Content Licensing Can Catalyze Fox’s Stock Price Movement

21st Century Fox (NASDAQ:FOX) has been struggling with lower ratings, and a shift in advertising dollars from television to digital has put pressure on advertising revenue growth. The rise of alternative video platforms is further adding to the woes. There are fewer viewers for traditional television than in even recent years and Fox, along with other media companies, has felt the effect. While there still remains uncertainty around the ratings environment, the company’s Movie & TV shows Licensing business has grown steadily and is expected to continue this trajectory. In fact, as more avenues of streaming come into the market, Fox may be able to generate more revenues in the form of content licensing fees and add incremental revenues of $3 billion over our current forecast. This could trigger a 10% upside to the stock, in our opinion.

• Trefis has a $39 price estimate for 21st Century Fox’s shares, translating into a $81 billion market cap. This is roughly 20% ahead of the current market price of around $33.
• We estimate the company’s 2015 revenues to be around $30 billion for an earnings per share of $1.70, compared to a consensus of $1.71 according to Reuters.

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Fox Is Leveraging Its Content Outside The Traditional Television

The Movie & TV shows Licensing division represents 21st Century Fox’s movie and TV show production and distribution business. The company’s studio arms, 20th Century Fox, Fox Searchlight Pictures and 20th Century Fox Animation, produce and distribute movies worldwide. Some of the popular movies they have released include the earlier Star Wars trilogy, X-Men series, and Avatar. These movies are licensed to television networks and alternative video platforms. Additionally, 20th Century Fox Television produces TV shows and licenses them to Fox’s broadcasting and cable networks, as well as networks owned by other media companies. The content is also licensed to streaming service providers such as Netflix and Hulu.

For 2014-15 season, the television arm of the studio produced several TV series, including Sleepy Hollow, Mind Games, New Girl, Last Man Standing, Modern Family and Empire. Given the popularity of these shows on television, especially in the desired 18-49 demographics, Fox has been aggressive in leveraging them outside the traditional television and has struck several video-on-demand deals with streaming providers such as Amazon Prime and Netflix. In March 2015, the company inked a fresh deal with Hulu for exclusive video-on-demand rights to Empire, Fox’s most successful TV series in the previous television season. ^[1]

More Licensing Avenues Can Catalyze The Segment Growth, Leading To A 10% Upside

Looking at the segment revenues, they have grown at an average annual rate of 12.5% in the last 6 years, from $2.72 billion in 2009 to a little under $5.0 billion in 2014. ^[2] A shift in audience from traditional television to digital platforms does result in lower ratings on traditional television, but with more avenues to stream the content, media companies have been able to grow the content licensing fees. We maintain our view that there is a place for both streaming and traditional television to co-exist in future and accordingly, we expect this uptrend to continue in the coming years.

We estimate the licensing revenues to be north of $8 billion by the end of our forecast period. An estimated EBITDA margin of over 20% will translate into EBITDA of $1.63 billion, representing over 13% of the company-wide EBITDA. However, higher than expected growth in licensing led by more streaming avenues could lead to an explosive growth in the segment revenues and translate into a 10% upside to our price estimate for 21st Century Fox. Here, we estimate the segment revenues to be north of $11 billion by 2021. Profit growth will not only come from higher revenues but also from higher EBITDA margins.

With continued growth in demand for alternative video platforms, the content owners can earn more licensing revenues. Nielsen will soon start measuring ratings on Netflix and this can help the content owners in negotiating the right price for their programming. Also, with more streaming options such as Apple’s (NASDAQ:AAPL) proposed streaming service and Sony’s Web TV, which is a new entrant into this space, licensing and distribution revenues can see significant growth in the coming years. The trend in the industry highlights that there will more streaming players in future and this is one avenue which the media companies can look upon to offset the declines seen on the traditional television front.

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1. Hulu Nabs ‘Empire’ Exclusive On-Demand Streaming Rights, The Wrap, Mar 19, 2015 [↩]
2. 21st Century Fox’s SEC Filings [↩]