Content Ownership Shift And Licensing Pivot Will Define A Cautious But Balanced Future

Catalysts

About Starz Entertainment

Starz Entertainment operates a premium television and streaming service focused on original series and licensed films for subscription video customers.

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

• Although ownership of original series like Fightland and other upcoming Starz owned titles is expected to support more stable content economics and international licensing income, the shift requires upfront development and production spending that can weigh on net margins and earnings during the transition period.
• While the move from operating services internationally to licensing, as seen with the Bell Canada agreement, points to steadier, higher visibility revenue streams, it also caps upside from direct subscriber growth in those regions and may limit long term revenue expansion compared with a fully owned global OTT footprint.
• Although management targets 20% margins exiting calendar 2028 and a 2.5x leverage ratio, the reliance on de aging the slate and lowering content cash spend from around US$700 million toward US$600 million to US$650 million means any production delays or weaker content efficiency could slow margin progress and keep adjusted OIBDA growth below expectations.
• While long running franchises such as Outlander, Power and P Valley currently support engagement and U.S. OTT subscriber additions, the announced final seasons and the need to launch new universes increase the risk that future tentpoles may not match current viewership, which could pressure revenue and raise marketing costs as a share of sales.
• Although management is exploring potential acquisitions to add AVOD scale alongside SVOD, a prolonged focus on deals that fit leverage targets and content profile could delay any diversification benefits, leaving revenue mix concentrated in subscription and content licensing and limiting earnings growth if streaming bundle partners change their packaging priorities.

Assumptions

This narrative explores a more pessimistic perspective on Starz Entertainment compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Starz Entertainment's revenue will decrease by 3.6% annually over the next 3 years.
• The bearish 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 $122.1 million (and earnings per share of $7.26) by about January 2029, up from $-280.9 million today.
• 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 2.2x on those 2029 earnings, up from -0.7x today. This future PE is lower than the current PE for the US Entertainment industry at 17.7x.
• The bearish 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 push to own more of the content slate, including shows like Fightland and other Starz owned originals, could meaningfully improve content economics through lower per episode production costs and incremental international licensing revenue, which would support higher margins and earnings over time.
• If output style international licensing deals such as the new Bell Canada agreement and potential future partners in other regions scale up, that could create a higher, more predictable revenue base than currently assumed, which would support stronger revenue and adjusted OIBDA.
• U.S. OTT subscribers have increased by 670,000 year over year to 12.3 million and engagement is at a 12 month high, and if this momentum continues alongside lower content cash spend, it could lift revenue and expand net margins faster than implied by a flat share price view.
• Management is targeting 20% margins exiting calendar 2028 and levering down from 3.4x to 2.5x. If cash flow normalizes as content payments smooth out and content spend trends toward the US$600 million to US$650 million range, the combination of higher margins and lower leverage could support higher earnings and equity value.
• If Starz executes on M&A that successfully adds an advertising supported streaming or linear network component on top of the existing subscription base, the broader revenue mix and potential churn benefits from AVOD plus SVOD could lift long term revenue and earnings beyond what a flat share price would imply.

Valuation

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

• The assumed bearish price target for Starz Entertainment is $11.0, which represents up to two standard deviations below the consensus price target of $19.38. This valuation is based on what can be assumed as the expectations of Starz Entertainment'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 $39.0, and the most bearish reporting a price target of just $11.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $1.2 billion, earnings will come to $122.1 million, and it would be trading on a PE ratio of 2.2x, assuming you use a discount rate of 12.5%.
  
• Given the current share price of $11.55, the analyst price target of $11.0 is 5.0% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.