Sequels To Avatar Will Boost Fox’s Market Share Of The Global Box-Office

21st Century Fox’s (NASDAQ:FOX) movie business has seen steady growth in the past few years, led by strong franchises and sequels to its popular movie titles. Accordingly, the box office revenues have grown steadily and are expected to continue this trajectory. We believe that the studio will primarily benefit from its sequels of Avatar in the coming years. Avatar is the highest grossing movie in history and its next sequels are eagerly awaited. Moreover, Fox plans to release 3 sequels to Avatar in 2017, 2018 and 2019, respectively. We believe that these movies will boost Fox’s global market share. Having said that, we note that the performance of a studio can be erratic as it largely depends on the audience and box office response, which can be fickle and hard to anticipate. Higher-than-expected growth in studio revenues could add incremental revenues of more than $1 billion over our current forecast. This would trigger a 5% upside to the stock, in our estimation.

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Fox’s Global Box Office Market Share Will Grow In The Coming Years

The overall studio business contributes around 25% to Fox’s value, according to our estimates. Fox’s global box-office revenues have increased from $1.1 billion in 2008 to $2.2 billion in the calendar year 2014. Looking at the global box-office market share, it has been in the range of 8% to 10%. However, this is just the box-office business. Fox’s studio generates revenues from electronic sales and content licensing of its movies and TV shows.

The studio distributed many successful titles such as Avatar and the X-Men series, among others, in recent years and this has aided the box-office revenue growth. Fox currently commands 10% market share with around $772 million grossing at the U.S. box-office for 2015. ^[1] However, the grosses, including international markets, currently stand around $1.80 billion, led by Kingsman: The Secret Service, Home and Taken 3, among others. Looking at 2016, the studio has a solid lineup, including X-Men: Apocalypse, Independence Day Resurgence and Ice Age: Collision Course. Looking further ahead, sequels around Avatar are likely to boost Fox’s market share in global box-office, in our view. It must be noted that Avatar has a massive fan base with over 50 million followers on its Facebook page. Given such following, the upcoming movies in this series are likely to do well at the box-office.

We estimate Fox’s box-office revenues will grow to around $3 billion, and an estimated EBITDA margin of 20% for Fox’s studio business will translate into EBITDA of $560 million, representing around 5% of the company’s overall EBITDA by the end of our forecast period. Also, Disney (NYSE:DIS) is developing a theme park attraction based on Avatar at Animal Kingdom park at the Walt Disney World Resort in Bay Lake, Florida. The attraction will likely open in 2017 and aid overall demand for the upcoming movies in this series. Having said that, Avatar will compete against Disney’s Star Wars movies in those years, which are also expected to do well, given the popularity of its earlier movies in the series and a massive fan following of Star Wars (see – Disney Lowers FY 16 Guidance, Though Star Wars And Shanghai Are Key Factors To Driving Future Growth).

Looking at movie and TV Show licensing, the business has been growing strongly for the company. Revenues have more than doubled from $2.3 billion in 2008 to $4.9 billion in calendar year 2014. ^[2] We expect this uptrend to continue in the coming years and estimate revenues to be northward of $8.5 billion by the end of our forecast period. Growth in licensing will be driven by increased production of shows and movies, and expansion in international markets. It must be noted that Fox produces several popular TV shows such as Glee, New Girl, Modern Family and 24, among others. The company distributes these shows to various platforms. Similarly, it also earns revenues by licensing popular movie titles. Accordingly, sequels around Avatar will further aid the movie licensing revenues for Fox. A better than expected performance of Avatar sequels could lead to higher revenue growth in the coming years and translate into a 5% upside to our price estimate for Fox. This growth will come not only from higher box-office grossing, but also from higher licensing revenues and electronic sales. Here, we assume Fox’s market share to grow to over 11% and licensing revenues to be north of $9.5 billion.

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1. Studio Market Share, Box Office Mojo [↩]
2. 21st Century Fox’s SEC Filings [↩]