What Can Move Time Warner’s Stock Higher?

TWX: Time Warner logo
TWX
Time Warner

While Time Warner (NYSE:TWX) is facing some pressure on revenues due to lower ratings at Turner networks, HBO is riding high with the success of its programming and boosting the company’s overall top line. HBO is now focused on making its content accessible on multiple platforms and has been expanding its subscriber base. It has also launched its over-the-top streaming service, which will also be available on Dish’s SLING streaming service. Over the next few years, we expect HBO revenues to grow, primarily due to growth in number of subscribers. However, there still remains uncertainty about the success of its new HBO Now streaming service, which suggests that there is room for stock price movement depending on how the service is received by HBO fans and broadband-only subscribers. We believe that growth in HBO’s subscribers, growth of HBO Now and a ratings rebound at Turner Networks can each catalyze Time Warner’s stock price movement.

See our complete analysis for Time Warner

HBO U.S. Subscriber Base Reaches 80 Million (+10% Upside To Stock Price)

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HBO expanded its subscriber base in the U.S. from 39.5 million in 2011 to 46.0 million in 2014. [1] The company has been investing in original programming such as True Blood and Game of Thrones and the investment has so far paid off well for the network, as is evident from the demand for its programming. Game of Thrones was the most pirated TV show in 2014 with episodes downloaded via torrent networks a whopping 48 million times last year. [2] Demand for the network’s programming is increasing and this can result in continued growth in subscribers. Moreover, in order to compete with HBO’s standalone service, some of the pay-TV operators have reduced HBO’s subscription prices to end customers. [3] With reduced pricing from pay-TV operators, many of the households that have not yet subscribed to HBO may opt for it now. We estimate that HBO U.S. could garner as much as $9 billion in annual subscription revenues, if the subscriber base reaches 80 million mark in the coming years.

We still take a conservative view in our pricing model, owing to the expected increase in competition in media industry and the growth of alternative video platforms. Accordingly, we assume 60 million subscribers and subscription revenues of around $7 billion by 2021. Nevertheless, massive demand for HBO’s content could add incremental revenues of close to $2-3 billion over the next few years, adding 10% to our price estimate and more than 10% to our EPS for 2020. This impact will come not only from improved subscriber base, but also from higher subscription fees.

HBO Now Subscriber Base Of 15 Million (+10% Upside To Stock Price)

HBO offers a standalone streaming service, primarily targeting broadband-only homes and others who haven’t subscribed to the network. There are more than 10 million broadband-only homes, as well as an additional 80 million homes in the U.S. that do not subscribe to HBO.  Given the rise of alternative video platforms, it becomes important for certain standout networks such as HBO, ESPN or CBS to make their programming available on different platforms. For instance, a broadband-only subscriber likes to watch movies and he can opt for HBO’s streaming service without a pay-TV connection at a less than one-fifth cost.

While there is appears to be a massive growth opportunity for HBO in the streaming arena, we take a conservative view in our pricing model, owing to expected increase in competition in the media industry. Accordingly, we currently assume 5 million subscribers by the end of our forecast period. Nevertheless, given the demand for HBO’s content, a standalone service may look attractive to many customers. If the network does manage to gain an overall streaming subscriber base of 15 million at $15 price tag, it would translate into incremental revenues of around $2.50 to $3.0 billion annually, which is far more than its current income from international operations and content licensing. This would add around 10% to the company’s stock value.

Turner Networks Ratings Grow By 10% (+10% Upside To Stock Price)

Turner Networks have been looking for a rebound in ratings, but its recent programming slate hasn’t seen the expected success. TNT and TBS’ advertising income declined more than 4% in 2014. This can be attributed to lower ratings, which led to a 6% drop in ad commitments during upfront ad sales. [4] While CNN was able to beat MSNBC in most of the ratings, its overall primetime ratings were down 9% in 2014. [5] The decline in ratings was widespread, due to a change in viewing habits with the rise of alternative video platforms. The millennials are rapidly shifting to digital platforms and so far, Nielsen doesn’t account for ratings on digital platforms. This has weighed on Turner Networks revenues in the recent past.

Having said this, it is possible that we are underestimating Turner’s competitiveness in key demographics. Turner networks have been trying to bring in new programming and came up with new shows in 2014 such as Murder in the First and The Last Ship, both of which were well received by the audience and scored high ratings. Nevertheless,  10% viewership growth annually for Turner Networks could add incremental advertising revenues of close to $2.50 billion over the next few years, adding 10% to our price estimate and more than 10% to our EPS for 2020.

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Notes:
  1. Time Warner’s SEC Filings []
  2. Top 10 Pirated TV Shows of 2014: ‘Game of Thrones,’ ‘Walking Dead’ Lead List, Variety, Jan 2, 2015 []
  3. Pay-TV operators lower HBO price ahead of a la carte launch, Fierce Cable, January 30, 2015 []
  4. Changing TV Landscape Colors ‘Upfront’ Ad Sales Outlook, The Wall Street Journal, March 25, 2015 []
  5. 2014 Cable News Ratings: CNN Beats MSNBC in Primetime Demo, Fox Still #1, MediaITE, Dec 30, 2014 []