Original Content Ownership And Licensing Model Will Drive Stronger Long Term Streaming Economics

Catalysts

About Starz Entertainment

Starz Entertainment operates a premium streaming and linear network focused on original series and movies targeted to women and underrepresented audiences.

What are the underlying business or industry changes driving this perspective?

• Accelerating ownership of original series such as Fightland and other in-house franchises increases control over production budgets and unlocks global licensing packages, supporting structurally higher revenue and expanding adjusted OIBDA margins toward the 20 percent goal.
• Shifting international markets, illustrated by the Canadian move from a joint venture to a licensing model, creates a template for stable, higher quality content deals in additional territories, which should lift recurring revenue and improve free cash flow visibility.
• Industry wide migration from linear to digital plays directly into Starz Entertainment’s proven track record and proprietary tech stack, enabling more profitable OTT subscriber growth and supporting sustained gains in earnings and margin.
• Deepening engagement in durable franchises like Outlander, Power, Spartacus and P Valley, including longer seasons such as Power: Origins, is expected to reduce churn and raise customer lifetime value, driving more efficient marketing spend and better net margins.
• Potential consolidation of media assets and the availability of under-monetized linear networks create opportunities to bolt on complementary AVOD businesses, which can diversify revenue, lower churn in the SVOD base and enhance long term earnings power.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Starz Entertainment's revenue will decrease by 2.8% annually over the next 3 years.
• Analysts are not forecasting that Starz Entertainment will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Starz Entertainment's profit margin will increase from -21.3% to the average US Entertainment industry of 10.4% in 3 years.
• If Starz Entertainment's profit margin were to converge on the industry average, you could expect earnings to reach $125.1 million (and earnings per share of $7.43) by about December 2028, up from $-280.9 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 3.7x on those 2028 earnings, up from -0.7x today. This future PE is lower than the current PE for the US Entertainment industry at 20.1x.
• Analysts expect the number of shares outstanding to grow by 0.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.5%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The broader streaming market is maturing in North America and facing pricing fatigue, and as a complementary service that depends heavily on bundling with larger platforms, Starz could see slower OTT subscriber additions or weaker pricing power over time. This would pressure revenue growth and limit operating leverage, ultimately constraining earnings.
• Management’s plan relies on de-aging the slate and ramping up ownership of originals like Fightland and other new series. If these shows underperform or franchise fatigue emerges in tentpoles such as Outlander, Power and Spartacus, the expected savings and international licensing upside may not materialize. This would weigh on content amortization efficiency, net margins and long term earnings.
• The strategic push to use international output style licensing deals, exemplified by the Canadian shift from a joint venture to a licensing model, assumes stable partners and strong demand for Starz owned IP. Any slowdown in international appetite for its content or unfavorable renegotiations would reduce recurring licensing revenue and dampen free cash flow improvement.
• The company is counting on a gradual normalization of cash content payments and lower annual content spend to drive deleveraging from leverage of 3.4 times toward its 2.5 times target. If cash flows remain choppy, if M&A or AVOD expansion requires more capital than expected, or if industry headwinds worsen, deleveraging could stall, raising interest costs and compressing net margins and earnings.
• Potential M&A to bolt on under monetized linear or AVOD assets is positioned as a growth and churn reduction opportunity. However, integration challenges, execution risk in converting legacy linear brands to digital and the need to avoid overleveraging could result in subscale acquisitions that fail to deliver expected synergies. This would lead to higher operating costs relative to revenue and depress adjusted OIBDA and free cash flow.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $19.38 for Starz Entertainment based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $39.0, and the most bearish reporting a price target of just $11.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $1.2 billion, earnings will come to $125.1 million, and it would be trading on a PE ratio of 3.7x, assuming you use a discount rate of 12.5%.
  
• Given the current share price of $11.59, the analyst price target of $19.38 is 40.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.