By Philip van Doorn
Warner Bros. Discovery is very cheaply priced to expected sales over the next year
Netflix Inc. has been firing on all cylinders, but analysts see little upside for the stock from here. That sets the stage for a screen of media companies, to see which ones are favored by analysts and which are expected to increase sales and profits most rapidly over the next two years.
Shares of Netflix Inc. (NFLX) rose 11% on Wednesday, following the video-streaming pioneer’s report late Tuesday of a spike in quarterly profits from a year earlier, as revenue rose 12.5%. That last figure showed the effect of newer advertising-supported subscriptions, as well as what the company calls “monetizing sharing.” Netflix took a flexible approach to curb password sharing, including giving users the ability to add family members to their accounts for less than it would cost to add another subscription. Compare that 12.5% sales-growth figure with year-over-year increases ranging from 1.9% to 7.8% over the previous four quarters.
Netflix also added 13 million subscriptions during the fourth quarter, when analysts had expected an increase of 8.7 million.
MarketWatch’s Jon Swartz explained how Netflix has been changing its programming mix to limit costs while remaining competitive.
With so many good things happening at Netflix, it might surprise you to learn that Deutsche Bank analyst Bryan Kraft downgraded the stock to a hold rating from a buy rating, writing in a note to clients that the company’s leading competitive position is “fully priced into the stock at these levels.” He also raised his price target for the stock to $525 from $460. His new target is 4% below Netflix’s closing price of $544.87 on Wednesday.
Netflix’s sector is not a high flier
Netflix is part of the S&P 500 communications sector, which was tied with information technology for the best performance this year through Wednesday among the 11 sectors in the U.S. benchmark index. This table shows how the sectors have performed, and it also shows their weighted forward price-to-earnings ratios:
Sector or index 2024 return 2023 return 2022 return Return since end of 2021 Forward P/E P/E to 5-year avg. P/E to 10-year av. P/E to 15-year avg.
Communication Services 6.7% 56% -40% 0% 18.1 95% 96% 103%
Information Technology 6.7% 58% -28% 21% 27.8 122% 146% 165%
Financials 1.9% 12% -11% 2% 14.6 99% 103% 110%
Healthcare 1.8% 2% -2% 2% 18.5 112% 113% 125%
Consumer Staples -0.3% 1% -1% 0% 19.4 97% 100% 109%
Industrials -1.2% 18% -5% 10% 19.7 94% 106% 116%
Energy -2.3% -1% 66% 60% 11.2 102% 60% 69%
Consumer Discretionary -2.3% 42% -37% -12% 25.2 82% 98% 113%
Materials -4.6% 13% -12% -6% 18.6 108% 113% 121%
Real Estate -4.7% 12% -26% -21% 17.3 88% 92% 92%
Utilities -5.4% -7% 2% -11% 15.2 83% 87% 95%
S&P 500 2.1% 26% -18% 6% 19.9 103% 111% 123%
Source: FactSet
Total returns include reinvested dividends. Looking at the communications sector, you can see that it is flat from the end of 2021, following the market’s seesaw pattern with an 18% decline for the S&P 500 SPX in 2022, followed by a 26% return in 2021.
The table also includes forward price-to-earnings ratios, which are based on Wednesday’s closing prices and consensus earnings-per-share estimates for the next 12 months among analysts polled by FactSet. These are compared with average forward P/E ratios (based on rolling forward-earnings estimates for those time periods), and you can see that on this basis, the communications sector trades a bit below or above its five-, 10- and 15-year average levels.
The full index and several sectors trade higher than the averages for all three periods, and the comparison of current P/E to the 15-year average is striking for the full index and a few of the sectors – especially information technology, with a current P/E valuation at 165% of its 15-year average.
You pay a higher price for more rapid growth. Based on aggregate calendar-year estimates, the S&P 500 communications sector, which is tracked by the Communication Services Select Sector SPDR exchange-traded fund XLC, is expected to show two-year compound annual growth rates of 5.8% for sales and 14.8% for earnings per share through 2025. In comparison, the S&P 500 Information Technology sector, tracked by the Technology Select Sector SPDR ETF XLK, is expected to have a sales CAGR of 9.3% and an EPS CAGR of 16.6% through 2025.
Screening the communications sector
This sector includes companies lumped in with “big tech,” such as Alphabet Inc. (GOOGL) and Facebook parent Meta Platforms Inc. (META). Alphabet owns YouTube and YouTube TV, the latter being a popular option for cable cord-cutters who want traditional channels in a more affordable package.
The sector also includes Walt Disney Co. (DIS), Warner Bros. Discovery Inc. (WBD) and Paramount Global (PARA) – three companies going through upheaval with high levels of debt as the streaming business model continues to shake out and as consumer habits change. All three own major movie studios. Analysts at MoffettNathanson expect U.S. domestic box-office sales to decline 10% this year to $8 billion and then to increase 8% in 2025 to $8.6 billion. That 2025 figure would be 24% below the firm’s estimate for 2019. It would seem that much of the movie-theater audience that was lost during the COVID-19 pandemic isn’t coming back.
So the steaming wars will continue, and the playing field is likely to change. Paramount is in play, with Skydance Media and a group of investors working on a bid to take the company private, according to a CNBC report.
The S&P 500 communications sector includes 19 companies, and we’re showing the entire list three times, first with a roundup of analysts’ ratings, then with a look at expected growth rates for sales and earnings, and finally with a summary of debt levels.
Ratings summary
Here are all of the companies in the S&P 500 communications sector, ranked by percentage of buy or equivalent ratings among analysts polled by FactSet.
Company Ticker Share buy ratings Share neutral ratings Share sell ratings Jan. 24 price Cons. price target Implied 12-month upside potential T-Mobile US Inc. TMUS 89% 7% 4% $162.00 $181.83 12% Live Nation Entertainment Inc. LYV 85% 10% 5% $89.35 $113.11 27% Alphabet Inc. Class A GOOGL 83% 17% 0% $148.70 $156.80 5% Take-Two Interactive Software Inc. TTWO 81% 15% 4% $165.90 $173.58 5% Meta Platforms Inc. Class A META 81% 16% 3% $390.70 $392.53 0% Walt Disney Co. DIS 73% 20% 7% $93.50 $102.17 9% Match Group Inc. MTCH 66% 34% 0% $36.94 $42.55 15% News Corp Class A NWSA 63% 37% 0% $24.63 $27.77 13% Comcast Corp. Class A CMCSA 61% 39% 0% $43.80 $50.12 14% Netflix Inc. NFLX 61% 33% 6% $544.87 $557.55 2% Warner Bros. Discovery Inc. Series A WBD 59% 38% 3% $10.41 $15.25 47% Electronic Arts Inc. EA 55% 45% 0% $137.86 $148.52 8%