The media stocks to own in 2024, according to Wells Fargo

While Wells Fargo expects challenging trends to persist into 2024 for the media group, it also says this may be a consolidation year. The firm prefers larger scale companies with Disney (DIS) still its top idea, citing what it views as the company’s “self-help risk/reward.”

STOCK IDEAS FOR 2024: For media companies, Wells Fargo expects challenging trends to persist into next year, including advertising, cord cutting and profitability. On the other hand, the firm also thinks this may be a consolidation year. Alongside its top idea Disney, Spotify (SPOT) and Netflix (NFLX) plus Universal Music Group (UMGNF) are also on Wells’ list of favorite names to own. For Disney, the firm expects earnings upside on direct-to-consumer efforts and clarity on ESPN. Meanwhile, it says Spotify is still a margin/free cash flow story, while Netflix and UMG show overall quality despite high valuations.

Wells’ favorite names to avoid/sell are Fox (FOXA) given risks around ESPN going direct-to-consumer and Fox News market share, Sinclair (SBGI) on debt and litigation risks, and AMC Networks (AMCX) given lack of M&A participation. The firm also upgraded Paramount (PARA) to Equal Weight and Clear Channel Outdoor (CCO) to Overweight, while downgrading Cinemark (CNK) to Underweight.

Noting that Deadline, The New York Times, Puck News and the Financial Times have all reported potential interest in National Amusements and Paramount’s controlling A shares, the firm increased its view of the probability of a 2024 M&A event that brings with it a “value-unlocking” strategy and management. Wells upgraded the stock to Equal Weight from Underweight with a price target of $18, up from $15.

More bullish on Clear Channel Outdoor, the firm upgraded the stock to Overweight from Equal Weight with a price target of $2.75, up from $1.50. Given inflecting growth and “a clearer path towards streamlining into America + Airports,” Wells sees shares rerating closer to domestic peers.

On the flip side, the firm downgraded Cinemark to Underweight from Equal Weight with a price target of $13, down from $16. Wells revised its 2024 domestic box office estimate down by 10% as it believes Street estimates for 2024 remain too high. The firm expects shares to be pressured over the near-term by further negative revisions.

MEDIA/ENTERTAINMENT THEMES: Direct-to-consumer is now about average-revenue-per-user, or ARPU, growth plus profits, including lower content spend, Wells says, adding it sees Netflix with most share and Disney with most upside. “The linear ice cube is melting fast” with Disney/Charter (CHTR) benefits still a couple of years out, Wells adds. The firm also believes Media M&A is “in the air,” which it sees as best for Paramount, Warner Bros. Discovery (WBD), Lionsgate (LGF.B).

AUDIO THEMES: In 2024, Wells expects the Labels to benefit from continued subscriber growth, changes to royalty structures and DSP price hikes. The firm prefers UMG given its scale/share, as high valuation equals high quality. Further, it thinks Warner Music (WMG) is set to spend on higher-growth A&R plus tech, which provides catalysts as the strategy unfolds. Wells continues to like Spotify upside on margins, and says Sirius XM (SIRI) has cleared the first overhang with the LSXM deal, and can focus on net adds/EBITDA growth.

ADVERTISING SERVICES THEMES: Ad Agencies are set to deliver +2.7% 2024 organic growth vs +2.5% in 2023, the firm says. While the Fed may be getting less aggressive there’s a lag effect on consumers, so Wells thinks CMOs will set 2024 budgets conservatively. Further, the firm expects tempered initial 2024 organic guides, and thinks Clear Channel Outdoor Americas will grow EBITDA by 6% in 2024, and has levered re-rating potential.