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 (NASDAQ:FOX)(NASDAQ:FOXA) was down 3% for both Class A and Class B shares, and the stock of Eros International (NYSE:EROS) 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.
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.
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|
|Fox Class A shares||(36%)||(34%)||10%|
|Fox Class B shares||(37%)||(34%)||12%|
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.