Please ensure Javascript is enabled for purposes of website accessibility

Why These Media Stocks Fell on Wednesday

By Jon Quast - May 13, 2020 at 5:53PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

If the economic slowdown continues, ViacomCBS, Fox, and Eros International could see revenue fall from reduced ad spending and lower subscriber growth.

What happened

It was a quiet morning until Federal Reserve Chairman Jerome Powell gave a midday speech about the economy. After his comments, most stocks headed lower, including top media companies. Shares of ViacomCBS (NASDAQ: VIAC) finished down 8%, Fox (FOX 0.51%) (FOXA 0.33%) was down 3% for both Class A and Class B shares, and the stock of Eros International (ESGC) was down 5%.

For media companies with pay-TV services, a lot of revenue is generated from advertising. And in a weak economy, there's less ad spending to go around.

Two people sit on a couch to watch TV.

Advertisers are reportedly cutting back on spending. Image source: Getty Images.

So what 

Powell's speech included how hard the economy is being hit by the COVID-19 pandemic, and suggested more action from both the Federal Reserve and the U.S. government is needed. His realistic tone rattled investors and sent the market averages sharply down.

So how did Powell's speech stoke fears toward media stocks specifically? Consider that both ViacomCBS and Fox have a large presence in TV broadcasting, and broadcasts run on ad dollars. That's a problem. The coronavirus-induced economic slowdown already has advertisers considering contract cancellations of $1 billion to $1.5 billion. There's no point spending money targeting consumers stuck at home.

Then there's the issue of sports. ViacomCBS lost crucial ad dollars with the cancellation of important events. But for Fox, the most important sports are the NFL and college football. Those sports haven't started yet, and therefore Fox hasn't lost that advertising revenue. Upon sharing this with investors last week, Fox stock rose. However, the longer the coronavirus drags on, the more real the possibility that football will be canceled, which would hurt Fox.

Eros International isn't the broadcasting empire that Fox and ViacomCBS are. Rather it's the top video-on-demand platform in India. It offers both a subscription package and an ad-supported free version. Even these could be hurt in an economic downturn. In a bad economy, fewer people would spend on discretionary items like subscription services. That could push users toward the free ad-supported version. And if advertisers cut back on spending, it's a double whammy. 

VIAC Chart

VIAC data by YCharts.

Now what

It's important to keep today's drop in perspective. Wall Street is volatile. Consider how much returns differ based on investors' starting point.

Stock 52-Week Return (Loss) Year-to-Date Return Return Since April 1
ViacomCBS (66%) (60%) 32%
Fox Class A shares (36%) (34%) 10%
Fox Class B shares (37%) (34%) 12%
Eros International (64%) (11%) 108%

Chart by author.

These companies' stocks have appreciated quite a bit since April 1, so a small pullback at some point was expected. And in a volatile market like this, the smallest sliver of news can send a stock sharply higher or lower in daily trading. Today it was lower.

As challenging as it is, investors should try to block out the daily noise and extend their time horizon. When it comes to media stocks, the more I extend my vision, the more I believe media will be consumed on demand. In that light, ad spending on linear TV will increasingly fall, with or without the coronavirus. 

All of these companies are transitioning toward streaming in some way. But I find ViacomCBS the most intriguing of the three right now. In the first quarter of 2020, its domestic streaming and digital video revenue was up 51%; customers were up 50% to 13.5 million. That's still a small portion of the U.S. population and could provide strong upside if the growth momentum continues in coming quarters. It also sports a reasonable valuation and (for now) a safe dividend.

ViacomCBS is a company I've added to my watch list. But investors need to take more into consideration than just the factors I've presented.

Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Eros International Plc Stock Quote
Eros International Plc
Fox Corporation Stock Quote
Fox Corporation
$36.50 (0.33%) $0.12
Fox Corporation Stock Quote
Fox Corporation
$33.74 (0.51%) $0.17

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/17/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.