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Investing.com -- Legacy media stocks may offer modest upside this earnings season, but investor focus is likely to center more on strategic breakups and deal-making than on quarterly fundamentals, according to Barclays (LON:BARC).
The investment bank says the risk/reward across the sector “appears to favor the sector into earnings,” as ad spending remained resilient in the quarter, particularly in sports-focused names.
While traditional TV advertising held up, streaming ad revenues continue to face pricing pressures amid growing inventory, “likely to remain a headwind for some time given that advertising on most streaming services is still not fully scaled.”
Upcoming go-to-market bundles from Comcast (NASDAQ:CMCSA) and Charter Communications (NASDAQ:CHTR) could slow subscriber losses in video, but Barclays notes it’s difficult to extrapolate trends given several new streaming launches expected later this year.
The arrival of ESPN and Fox’s streaming platforms will give U.S. consumers access to all major sports online, increasing the risk of accelerated cord cutting.
Beyond earnings, corporate actions are expected to be the main valuation driver. The Comcast and Warner Bros. Discovery (NASDAQ:WBD) breakups, as well as the Paramount-Skydance merger, could reshape industry structure.
“Investor sentiment with respect to these corporate actions remains negative, but these announcements at best feel like an intermediate step rather than an equilibrium state for the industry,” analysts led by Kannan Venkateshwar noted.
Paramount is likely to attract scrutiny around deal-related assumptions, including aggressive synergy targets.
“It is tough for us to see how Skydance delivers on its synergy or EBITDA goals of $2bn+ and $4.5bn by 2027 as neither company has provided much by way of detail with respect to these goals,” the analysts continued.
Disney (NYSE:DIS) stands out with a strong content slate, a broader Hulu rollout, and progress on theme park expansion. Barclays views Disney as the “best risk reward across our coverage universe at present” and lifted its price target to $140 from $120.
For WBD, ad trends have held better than expected, but the company’s limited sports inventory and near-term cash flow drag from refinancing may weigh on results. However, Barclays believes “individual components may trade at the high end of valuation ranges” post-split.
Meanwhile, Fox continues to outperform on execution, but analysts see limited room for further valuation expansion given its earnings are still largely dependent on linear TV, especially Fox News, which remains untransferred to streaming.
On the valuation front, Fox is currently trading near multi-year highs, driven by strong execution, though further valuation expansion appears unlikely without a clearer growth narrative, analysts added.
Overall, Barclays suggests that despite structural concerns, the downside for legacy media in Q2 may be limited “absent a significant deterioration in fundamentals.”