Global Digital Demand And Franchises Will Unlock Value

Key Takeaways

• Separation from Starz and focus on content allows Lionsgate to streamline operations, improve margins, and drive earnings growth.
  
• Expanding digital distribution, monetizing IP, and leveraging high-profile franchises position Lionsgate for sustained revenue streams and increased strategic value.
  
• Industry consolidation, high debt, and shifting content consumption habits are undermining Lionsgate's revenue potential, negotiating power, and financial flexibility, posing risks to sustained growth.

Catalysts

Engages in the film, television, subscription, and location-based entertainment businesses in the United States, Canada, and internationally.

• Separation of Lionsgate and Starz creates a pure-play content studio with a simplified capital structure, unlocking shareholder value and enabling more focused resource allocation and margin improvement; this can drive both net margin and earnings growth.
  
• Growth in global digital content consumption and the expansion of FAST/AVOD channels are fueling record library sales ($956 million TTM, up 8% YoY), positioning Lionsgate to further monetize its deep IP portfolio and increase recurring, high-margin revenue.
  
• Robust pipeline of high-profile franchises (Hunger Games, John Wick, Michael Jackson biopic, Twilight, faith-based films) and spin-offs, alongside new TV content and third-party distribution deals, supports future revenue and earnings visibility as demand for premium IP remains strong worldwide.
  
• Strategic initiatives in digital distribution and creator economy partnerships (brand deals, digital platforms, AI-enabled workflows) allow Lionsgate to leverage its content across emerging platforms, potentially lifting both revenue and net margins through new monetization streams and cost efficiencies.
  
• Industry consolidation and rising demand for quality independent studio content can increase Lionsgate's strategic value as an acquisition target or licensing partner, supporting a higher potential valuation and improved free cash flow conversion over time.

Lionsgate Studios Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Lionsgate Studios's revenue will decrease by 3.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from -9.0% today to 2.6% in 3 years time.
• Analysts expect earnings to reach $93.4 million (and earnings per share of $0.26) by about July 2028, up from $-357.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $130 million in earnings, and the most bearish expecting $58.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 48.7x on those 2028 earnings, up from -5.2x today. This future PE is greater than the current PE for the US Entertainment industry at 26.9x.
• Analysts expect the number of shares outstanding to grow by 6.32% 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.

Lionsgate Studios Future Earnings Per Share Growth

Risks

• Intensifying pressure on key streaming buyers and platforms to control spending and reduce budgets could dampen demand for new content, limiting Lionsgate's ability to grow or even sustain TV production revenue as buyers become more disciplined, impacting both top-line revenue and long-term earnings.
  
• Continued industry uncertainty and rationalization-driven by ongoing consolidation talks among major media companies and regulatory uncertainty-may lead to a reduction in the number of content buyers and potentially less favorable licensing arrangements, thereby straining Lionsgate's revenue growth and negotiating leverage for high-value deals.
  
• Persistent high leverage, with net debt at 4.9x to 5.5x trailing OIBDA, and reliance on free cash flow back-loaded to future quarters and years, leaves Lionsgate with limited financial flexibility and increases balance sheet risk, potentially constraining investment in content and growth initiatives, and weighing on net margins and long-term earnings.
  
• The ongoing shift in consumer behavior toward user-generated and short-form content (e.g., YouTube and TikTok) poses a secular headwind to traditional film and TV products, challenging Lionsgate's core business model and threatening the durability of its legacy content library-driven revenue streams.
  
• Rising production and talent costs across the industry, combined with the necessity for disciplined P&A and continued dependence on hit-driven tentpoles, risks higher operating expenses and volatile cash flow in weaker years, which could compress net margins and heighten the risk of operational losses if blockbuster performance is not sustained.

Valuation

• The analysts have a consensus price target of $9.54 for Lionsgate Studios 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 $11.61, and the most bearish reporting a price target of just $8.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.5 billion, earnings will come to $93.4 million, and it would be trading on a PE ratio of 48.7x, assuming you use a discount rate of 11.6%.
• Given the current share price of $6.47, the analyst price target of $9.54 is 32.2% 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.