Traditional Broadcast Reliance Will Undermine Future Ad Revenues

Key Takeaways

• Accelerating declines in traditional TV viewership and ad revenue threaten Gray Media’s core business, as digital gains remain insufficient to counteract legacy losses.
  
• High debt from past acquisitions limits financial flexibility, while rising costs and increased competition put additional pressure on margins and future profitability.
  
• Local sports expansion, debt reduction, strong studio occupancy, political ad growth, and favorable regulations position Gray Media for improved earnings and operational flexibility.

Catalysts

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

• Amid an accelerating long-term decline in linear TV consumption, Gray Media's heavy reliance on traditional broadcast advertising is likely to drive ongoing erosion of core ad revenues, with Q1 2025 core ad revenue already down 8% year-over-year and limited signs of stabilization, which will strain both top-line growth and net earnings over the next several years.
  
• Younger demographics are rapidly shifting toward digital, mobile, and on-demand video, undermining the relevance of Gray's core local broadcasting business and diminishing future ad revenue growth despite incremental gains in digital, as the company's current digital expansion remains too small to offset steep declines in its legacy business.
  
• Persistent cord-cutting and contraction of cable TV subscriber bases are set to pressure retransmission fee growth, with upcoming affiliate renegotiations in a fragmented pay TV market threatening both recurring revenues and EBITDA margins as Gray loses negotiating leverage over time.
  
• Gray’s elevated leverage, stemming from years of aggressive M&A activity, limits financial flexibility and could force further cost cuts or reduced investment, putting further pressure on operating margins, capital allocation options, and credit risk even as interest expense remains high.
  
• Intensifying competition from large digital-first advertising platforms and ongoing cost inflation for content production and technology upgrades are expected to compress margins across the business, with rising operating expenses and regulatory compliance risks likely to contribute to weaker profitability and lower free cash flow through the medium
• to long-term.

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 4.3% 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 6.3% to the average US Media industry of 9.4% in 3 years.
• If Gray Media's profit margin were to converge on the industry average, you could expect earnings to reach $297.2 million (and earnings per share of $2.97) by about July 2028, up from $226.0 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 0.9x on those 2028 earnings, down from 2.3x today. This future PE is lower than the current PE for the US Media industry at 20.2x.
• Analysts expect the number of shares outstanding to grow by 1.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.6%, as per the Simply Wall St company report.

Gray Media Future Earnings Per Share Growth

Risks

• Despite recent revenue declines, Gray Media’s ongoing expansion of local sports broadcasting—now reaching 80 percent of its markets—creates a distinctive and defensible content niche that could strengthen long-term advertising revenue and help stabilize or grow earnings.
  
• The company is actively managing and reducing its debt, recently lowering leverage and improving liquidity by expanding its accounts receivable facility and revolver, which may reduce interest expenses and restore financial flexibility, supporting stronger net income over time.
  
• Assembly Studios, Gray’s significant investment in Atlanta, is already achieving high occupancy rates near 75 to 80 percent, and as more leases are signed and productions increase, this business could generate meaningful incremental revenue and potentially improve profit margins through high contribution real estate returns.
  
• Increased political advertising is yielding higher-than-expected off-cycle revenue, and ongoing political polarization in the U.S. points to continued record spending in future election cycles, creating substantial upside for Gray Media’s top-line and EBITDA performance.
  
• Evolving regulatory trends, including a more relaxed tone from Washington toward broadcaster consolidation, could present Gray Media with M&A opportunities that allow it to create new duopolies and achieve scale efficiencies, thus improving operating leverage and earnings growth potential in the long term.

Valuation

• The assumed bearish price target for Gray Media is $2.0, 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 $7.0, and the most bearish reporting a price target of just $2.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $3.2 billion, earnings will come to $297.2 million, and it would be trading on a PE ratio of 0.9x, assuming you use a discount rate of 11.6%.
• Given the current share price of $5.31, the bearish analyst price target of $2.0 is 165.5% 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.