Zacks Industry Outlook Highlights Warner Music, iQIYI and CuriosityStream

For Immediate Release

Chicago, IL – July 29, 2022 – Today, Zacks Equity Research discusses Warner Music Group WMG, iQIYI IQ and CuriosityStream CURI.

Industry: Entertainment

Link: https://www.zacks.com/commentary/1959463/3-stocks-to-watch-in-a-challenging-entertainment-industry

The Zacks Film and Television Production and Distribution industry is benefiting from a spike in demand for digital entertainment, fueled by capacity and operational limitations in movie theaters, theme parks and cruise lines and continued restrictions on travel. Increased consumption of media, music and news over the web due to the pandemic-induced lockdowns and shelter-at-home guidelines has been a key catalyst for industry participants like Warner Music Group, iQIYI and CuriosityStream. Steady recovery in the advertising spending environment and resumption of production pipelines bode well for film and television production companies.

Industry Description

The Zacks Film and Television Production and Distribution industry comprises companies involved in film and TV production, distribution and exhibition. The main activities of the industry participants include the production and distribution of entertainment content to theaters, TV networks, video-on-demand platforms, streaming services and other exhibitors. Imax Corporation offers entertainment technology and specializes in motion picture technologies and presentations.

Industry participants produce and distribute motion pictures for theatrical and straight-to-video release besides TV programming. These players are heavily dependent on the box-office performance of their films, both domestically and internationally, the number of film releases and the ratings of TV shows.

3 Film and Television Production Industry Trends in Focus

Over-the-Top Services Gaining Prominence: Companies involved in content creation are looking to distribute content through over-the-top services to leverage the popularity of their franchises. With this, they are looking to provide exclusive content and a differentiated experience. However, streaming companies are increasingly producing original and award-winning feed to reduce licensing costs and excessive dependence on third-party content providers. This is likely to hurt industry participants' content distribution strategy.

Binge-Watching Driving Consumption: Factors such as binge-watching, deepening Internet penetration and advancement in mobile, video, and wireless technologies have got viewers glued to small screens. In order to keep pace with new consumption patterns, industry participants are turning to digital content distribution. The emergence of digital capabilities is making consumer data easily available to companies.

With the use of AI tools, production houses are gaining a better understanding of user preference. This is helping them produce content that strikes a chord with viewers. However, increasing spending on content and sales & marketing is hurting profitability due to stiff competition from streaming players.

Technological Advancement Aids Prospects: Exhibitors are turning to highly efficient and cost-effective technologies like laser-based projection systems to enhance image quality and the entire movie experience. Additionally, the use of technologies like motion seating, immersive audio systems and interactive movies among others is expected to enhance the viewing experience.

The increasing adoption of AR and VR technologies bodes well for industry participants. However, the evolution of alternative motion picture distribution channels such as home video, pay-per-view, streaming services, video-on-demand, Internet and syndicated and broadcast television is hurting exhibitors.

Zacks Industry Rank Indicates Dull Prospects

The Zacks Film and Television Production and Distribution industry is housed within the broader Zacks Consumer Discretionary sector. It carries a Zacks Industry Rank #205, which places it in the bottom 19% of more than 250 Zacks industries.

The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued underperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry's position in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic on this group's earnings growth potential. Since May 31, 2022, estimates for the current year have moved 9.3% south.

Despite the gloomy industry outlook, a few stocks are worth watching based on a strong earnings outlook. Before we present a few stocks that you may want to consider for your portfolio, let's take a look at the industry's recent stock-market performance and valuation picture.

Industry Lags S&P 500, Beats Sector

The Zacks Film and Television Production and Distribution industry has underperformed the Zacks S&P 500 composite but beat its own sector in the past year.

The stocks in this industry have collectively lost 30.8% compared with the S&P 500's decline of 12.1% and the Zacks Consumer Discretionary sector's decline of 37.6% over the same time frame.

Industry's Current Valuation

On the basis of the trailing 12-month price-to-sales (P/S), a commonly used multiple for valuing Film and Television Production and Distribution stocks, the industry is currently trading at 1.27X compared with the S&P 500's 4.74X and the sector's 1.79X.

Over the past five years, the industry has traded as high as 2.48X and as low as 0.92X, recording a median of 1.49X.

3 Film & Television Stocks to Watch Right Now

iQIYI: The company offers movies, television dramas, variety shows and other video contents. Recently, the company entered into a definitive agreement with Douyin, pursuant to which it will license select content to Douyin for editing and distribution as short form videos in the formats agreed by the two companies.

The company already has a huge subscriber base in China, which is one of the biggest consumer markets in the world. Strong demand for company-produced drama series, original movies and variety shows in international markets is a key catalyst in driving top-line growth in the near term.

iQIYI's shares are down 7% year to date. The Zacks Consensus Estimate for this Zacks Rank #1 (Strong Buy) company's fiscal 2022 loss has remained steady at 20 cents per share over the past 30 days. You can see the complete list of today's Zacks #1 Rank stocks here.

Warner Music Group: This Zacks Rank #3 (Hold) company is benefiting from continued growth in Recorded Music licensing and Music Publishing synchronization revenues, including revenues from emerging streaming platforms.

Moreover, continued investments in international markets are expected to aid the top line. In the second quarter, the company announced the acquisition of Qanawat Music, MENA's largest independent distributor, expanding its presence in the market. Moreover, Warner Music Group partnered with Jjust Music, providing the company with access to Bollywood releases.

The Zacks Consensus Estimate for fiscal 2022 earnings has declined 4.4% to 86 cents per share over the past 30 days. Warner Music's shares have declined 32% year to date.

CuriosityStream: The company features more than 10,000 titles and has embarked on an original production and content acquisition plan. Continued strength in direct subscription revenues and contributions from program sales and sponsorships/advertising are expected to remain key catalysts.

The company is benefiting from its unique content distribution strategy through its solid partner base. Through the end of 2022, the company is expected to invest more than $188 million in original productions and acquired content. The company has invested over $15-20 million in acquisitions like One Day University and Learn25 and partnerships like Spiegel and Nebula, which brought additional content into the company's content ecosystem.

The Zacks Consensus Estimate for this Zacks Rank #3 company's 2022 loss per share has become wider by a penny to 95 cents per share over the past 30 days. CuriosityStream's shares have declined 70.8% year to date.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.

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