Barbie. Oppenheimer. Strikes. Streaming. Netflix.
Barbie smashes box office records for Warner Bros. Writers have a tentative deal with the studios. Actors are still on strike.
Last night, the Writers Guild announced a tentative deal with the studios, which could potentially end the writers’ strike. The SAG-AFTRA union is interested in the details of the deal, which haven’t been disclosed yet. However, the actors’ strike continues. The production downtime since May is hard on the wallets of the actors, writers and everyone involved with the filmmaking process. It could also severely impact studio earnings in 2024 and beyond, if the strike isn’t resolved soon. All of the networks have programmed unscripted TV shows for the fall, which are unaffected by the strikes.
Meanwhile, Barbie is breaking box office records for Warner Bros. It is Warner Brothers biggest hit in its 100-year history — bigger than Harry Potter and the Deathly Hallows Part II was for the studio. Oppenheimer is a close second to Barbie with $925.9 million vs. $1.38 billion in global box office receipts (as of early September 2023). Special shoutout to director Greta Gerwig for smashing many records, including opening weekend box office (female director) and highest grossing live-action picture (female filmmaker, global).
The success of these two epic hits will boost the Q3 2023 earnings reports for both Warner Brothers, the studio that made Barbie, and Universal Pictures, the studio that released Oppenheimer. (Universal is part of NBCUniversal, which is owned by Comcast.) Does that make them great investments?
Below are just a few of the things we’ll cover in this blog.
Barbie (Warner Bros.) and Oppenheimer (Universal) Earnings
Writers Strike a Deal.
Actors are Still on Strike
Streaming vs. Theatres
Barbie (Warner Bros.) and Oppenheimer (Universal) Earnings
Warner Bros. Discovery and Comcast Corporation, the parent companies of Warner Bros. and Universal Pictures, are both heavily indebted. Both companies had flat year-over-year revenue in the second quarter (like most of the studios on the stock report card). Having an extra billion plus in revenue will certainly do wonders for both studios. However, it’s also important for investors to realize the impact that corporate debt has on these companies. Warner Bros. Discovery has been paying $900 million in interest semiannually, and lost $7.37 billion in 2022 (while paying CEO David Zaslav $39.3 million in 2022 and $246.6 million in 2021). Both Comcast and Warner Bros. Discovery are using proceeds from their blockbusters to repurchase debt that comes due in 2024 and 2025. S&P Global rates Warner Bros Discover BBB-, the lowest rung of investment grade.
As an interesting aside, Christopher Nolan switched to Universal from Warner Bros. during the pandemic, when he protested Warner Bros. policy to release directly to streaming platforms (at a time when people couldn’t go to the theaters). There is talk that Warner Bros. is trying to woo him back… Nolan is quite a blockbuster box office phenomenon, with worldwide receipts of almost $6 billion (gross). Warner Brothers is expanding the London studios that made Barbie, the Harry Potter franchise and House of Dragon. DC studios will be based there, once complete.
Writers Strike a Deal
The Writers Guild began their strike on May 2, 2023 and struck a tentative agreement on September 24, 2023. In addition to compensation, artificial intelligence played a very central role in the dispute. The strike is not officially over until the WGA and the members approve of the terms, and the 3-year deal is inked. There haven’t been any details released about the agreement over AI. The deal could provide a framework for a settlement with the actors.
Actors are Still on Strike
The SAG-AFTRA strike officially commenced on July 14, 2023. However, the members have been walking the picket line with their writing colleagues since the onset of the writers’ strike. Streaming compensation and residuals have reduced the income of both writers and actors. Although both builds have superstars, the majority of the membership doesn’t make a living wage for Los Angeles, California. The Writers Guild alleges that the median wage of writers has actually gone down -14% over the past few years – -23%, if adjusted for inflation.
If the writer’s deal with the studios includes strong limitations or an outright curtailment of artificial intelligence use for creative purposes, this bodes well for an early end to the SAG-AFTRA strike. We will know a lot more in the coming days. While this will be great news for hundreds of thousands, if not millions, of people whose livelihoods depend on the film industry, it is unlikely that it is going to solve the problem of inflation and unaffordability in the expensive cities, where a great deal of the studios are located.
Streaming vs. Theatres
Theaters are doing better than they were during the pandemic. However, they are still far below the revenue of 2019. AMC Theatres had revenue at $5.5 billion in 2019. The revenue was just $3.9 billion in 2022. An annual increase equal to the 15.56% revenue jump in the second quarter could get the sales up to $4.5 billion. Certainly, Barbie and Oppenheimer, which were both exclusive theatrical releases will help. However, a key piece of the puzzle is that AMC Theatres wasn’t able to turn a profit even before the pandemic. The company has lost money every year since 2016, with the exception of a slim net profit of $110.10 million in 2018.
The studios, including Disney, Netflix, Comcast (Universal) Apple, Paramount and Warner Bros. Discovery are characterized with flat revenue growth and, with the exception of Paramount and Warner Bros. Discovery, high valuations. Price-earnings ratios range from 29 (Comcast and Apple) to 45 and 66 (Netflix and Disney, respectively). The average P/E is 17.
Should a company like Netflix, with $4.5 billion in net profits in 2022, be valued at $168 billion? Should Apple, a company with negative year-over-year sales growth of -1.40% and almost $100 billion in net income be valued at $2.73 trillion – particularly when almost 20% of its revenue comes from China and there is a new government ban on iPhones?
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In addition to having the most exciting upcoming quarterly earnings, Warner Bros. Discovery also has one of the more attractive price-earnings ratios, at just 7.23. However, as I’ve indicated above, an investment in Warner Bros. Discovery is also dogged by debt. Any company that has been around for a century is going to have a lot more legacy issues than the streaming and Internet-based companies that have only been around since the 1990s. Apple’s debt is elevated as well, with a debt-equity ratio of 1.81, largely because the company liked to park its European and Asian profits overseas, and borrow money in the USA (at a very attractive interest rate) to pay dividends and buyback its own stock.
A quick end to the writers and actors strike could save the day for the studios in terms of content. However, the high valuations, debt loads, streaming wars and flat earnings make most investments in this space highly volatile. Most of the streaming stocks have seen their share prices soar and plunge repeatedly over the past five years. In addition to a hostile environment for the industry, the macro environment could be facing headwinds.
The economy and the stock market have been very resilient this year, after losing almost -20% in 2022. Consumers, federal spending and businesses investing in technology and artificial intelligence have kept the economy strong amidst the rapid rise of interest rates. However, a lot of that support is expected to weaken. Student loan payments start up on October 1, 2023, after the pandemic pause. Delinquencies on credit card debt and auto loans are starting to rise. The personal savings rate has plunged to historic lows. And the government is about to be shut down because Congress can’t agree on spending cuts.
GDP growth is expected to continue at a pace of about 2.1% for the full year. The Conference Board is predicting a mild recession in the first two quarters of 2024. Investors are forward-thinking. So if Wall Street pros sees signs of a contraction, stocks will weaken.
21st-century recessions have caused severe plunges in the major indices. Stocks sank -35% between Feb. 19 and March 23, 2020, during the pandemic. A million dollar investment in the Dow Jones Industrial Average dropped to $450,000 in the Great Recession, and plummeted to a low of $220,000 in the NASDAQ Composite Index, during the Dot Com Recession.
One of the biggest risks to market performance for the rest of 2023 remains the ban that the Chinese government put on Apple iPhones. Apple buybacks have been a huge driver of stocks for over a decade, with almost $625 billion shares repurchased by the company. The last time Apple had a downside surprise was in the last quarter of 2018. The company ceased their buybacks that December, without any warning or announcement. The S&P500 took a dive of -9.18%, which was the worst December performance since the Great Depression.
Of course, 2019 was a spectacular year for stocks. However, the secular bull market we’ve enjoyed since 2009 is quite abnormal. While staying invested for continued upside is a good idea, protecting your wealth from a downturn is also prudent. Market timing doesn’t work, but proper diversification and regular rebalancing with a capture gains mentality has been a spectacular 21st Century nest egg strategy.
Investing in the smash hits Barbie and Oppenheimer is a lot more complicated than just cashing in on their box office success. A lot of the proceeds from both of these films is going to pay down debt. The industry is experiencing upheaval due to strikes and streaming wars. And many of the company stocks are overpriced.
With individual companies, including studio stocks, it’s a great idea to have a buy low and capture gains high – early and often – policy. For your nest egg, it’s a good time to make sure that you have the right amount safe, are properly diversified and know what is safe in a year when banks have failed and bonds lost more than stocks.
Full disclosure: I own positions in Warner Bros Discovery.
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Natalie Pace is the co-creator of the Earth Gratitude Project and the author of The Power of 8 Billion: It's Up to Us, The ABCs of Money, The ABCs of Money for College, The Gratitude Game and Put Your Money Where Your Heart Is. She is a repeat guest & speaker on national news shows and stages. She has been ranked the No. 1 stock picker, above over 830 A-list pundits, by an independent tracking agency, and has been saving homes and nest eggs since 1999.