Falling Linear TV Audiences Will Erode Advertising Revenues

Key Takeaways

• Ongoing shifts to streaming and digital platforms are eroding traditional broadcast audiences and advertising revenue sources for Gray Media.
  
• Reliance on acquisitions and high capital spending increases financial risk, while political ad revenue becomes less predictable and more volatile.
  
• Strategic acquisitions, deleveraging, and digital innovation drive revenue diversification, margin expansion, and resilience against traditional media decline through enhanced content and targeted advertising.

Catalysts

A multimedia company, owns and/or operates television stations and digital assets in the United States.

• The persistent decline in traditional linear television audiences, especially among younger demographics shifting viewing to streaming platforms, is reducing the long-term addressable market for Gray Media's core broadcast business, ultimately pressuring both advertising revenues and retransmission fees.
  
• The accelerating growth in digital ad spend commanded by technology giants like Google, Meta, and Amazon is diverting both national and local advertising dollars away from local broadcasters, sharply limiting Gray Media's future revenue growth opportunities despite digital transformation efforts.
  
• Heavy reliance on acquisition-driven expansion is increasing Gray Media's leverage and exposing the company to greater integration and execution risks at a time when the incremental value and earnings contributions of small
• and mid-sized market stations are slowing, which could further depress long-term net margins.
  
• Political advertising, while robust in even-numbered years, is increasingly susceptible to budget reallocations toward digital channels and social platforms, further amplifying revenue volatility and making Gray Media's top-line growth less predictable and structurally weaker in non-election years.
  
• Large ongoing capital requirements-ranging from ATSC 3.0 broadcast technology upgrades to significant content production investments-are likely to outpace the pace of revenue or audience gains in a structurally challenged market, constraining future free cash flow and limiting the company's ability to sustain earnings growth.

Gray Media Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Gray Media compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Gray Media's revenue will decrease by 6.9% annually over the next 3 years.
• The bearish analysts are not forecasting that Gray Media will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Gray Media's profit margin will increase from 4.2% to the average US Media industry of 9.9% in 3 years.
• If Gray Media's profit margin were to converge on the industry average, you could expect earnings to reach $284.1 million (and earnings per share of $2.81) by about August 2028, up from $148.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 1.5x on those 2028 earnings, down from 3.7x today. This future PE is lower than the current PE for the US Media industry at 20.5x.
• Analysts expect the number of shares outstanding to grow by 1.49% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.32%, as per the Simply Wall St company report.

Gray Media Future Earnings Per Share Growth

Risks

• Gray Media's ongoing strategic acquisitions in key midsized and small markets, particularly those that create duopolies, are projected to be immediately cash flow accretive and to enhance revenue diversification and bargaining power, both of which support long-term revenue growth and margin expansion.
  
• The company's strong track record of deleveraging through M&A and capital allocation-demonstrated by past rapid reduction of leverage after large transactions-positions Gray Media to benefit from increased cash flow and lower cost of debt, positively impacting net margins and earnings.
  
• Continued robust demand for political advertising, especially in highly competitive cycles and issue advocacy even in non-election years, supports stable or rising advertising revenue, underpinning stronger top-line performance than secular declines alone might suggest.
  
• Investments in local news, sports, and proprietary content have led to rising audience engagement, national recognition for journalistic excellence, and expanded local sports deals, which increase brand loyalty and open the door for higher advertising rates and retransmission fees, benefiting core revenues and profitability.
  
• The adoption and integration of next-generation broadcast technologies, along with a commitment to digital revenue streams and local direct business, enable Gray Media to tap into secular trends of advertisers seeking targeted, multiplatform campaigns, which may offset traditional TV declines and sustain or grow earnings over the long term.

Valuation

• The assumed bearish price target for Gray Media is $3.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Gray Media's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $9.0, and the most bearish reporting a price target of just $3.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $2.9 billion, earnings will come to $284.1 million, and it would be trading on a PE ratio of 1.5x, assuming you use a discount rate of 12.3%.
• Given the current share price of $5.72, the bearish analyst price target of $3.0 is 90.7% lower.
• 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.