What: Investors were closing the curtains on Starz(NASDAQ:STRZA)last month as shares of the entertainment company fell 10% according to data from S&P Capital IQ. The stock took a hit when it released its earnings report at the end of the month.
So what: Like other big media companies, the cable provider is facing strong headwinds from the threat of cord-cutting and the transition to streaming services like Netflix. Revenue at Starz slid 1% in the quarter to $404 million, missing estimates, and though the Starz network reported one million additional subscribers from the previous year, its sister network Encore lost one million in that period. Both networks also saw a 1.8% decline in subscribership from the previous quarter, but the summer months tend to be weak ones for cable providers.
Starz continues to perform well relative to its peers as it has passed Showtime as the No. 2 cable network, and sales from the networks were actually up 1% in the quarter. However, its distribution revenue dropped 11% due to lower revenue from The Walking Dead and no new significant releases of original series.
Now what: In part, Starz's recent drop owes to its being a victim of its own success. The stock is still up more than 10% over the past year, although shares have fallen about a quarter since their summertime peak, mirroring a broader sell-off in media stocks.
The company also continues to be the subject of merger rumors with either AMC Networks or Lions Gate as John Malone, Starz's largest shareholder, is known for his penchant for deal-making. Like its big media peers, Starz will have to confront the changing market, and at a price-to-earnings of 12 times, an acquisition may be the best outcome. Unlike its larger rivals, Starz is not particularly diversified and relies primarily on its premium networks. The company has also not yet released a streaming service, unlike HBO or Showtime, which could be another option to drive future growth.
Jeremy Bowman owns shares of Netflix. The Motley Fool owns shares of and recommends AMC Networks, Lions Gate Entertainment, and Netflix. The Motley Fool recommends Starz. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.