Above: Hollywood vs. Wall Street echoes the famous William Goldman quote “Nobody knows anything”
Among many media outlets covering the entertainment business is the usually well-informed, lively newsletter, The Ankler. It is now recognized as one of the most reliable sources of inside Hollywood news.
An August 6th article headlined, “Often dead wrong but never in doubt: How analysts plague Hollywood”. The article examines if Wall Street analysts exercise excessive influence on the trading of its stocks.
Exhibit A: Cited as the history of one of the top-performing analysts in the space: Ms. Jessica Reif Ehrlich, for 30 years a Bank of America star who publicly admitted to a massive pre-opening blunder on her call on the shares of Warner Bros. Discovery (NASDAQ:WBD) over two years ago. These were:
- April 11, 2022: She implied that we could see an 82% spike in the WBD stock on debut. After the open, the stock was $24. She was among the biggest bulls on the spinoff.
- 2 years later, after billions have been lost and 2,000 layoffs, WBD struggles to break $10.
On July 6th, after bullish calls on the sock:
- July 16th, she warned, “WBD cannot continue status quo. Zaslav must use all options on the table…” These included spinning off MAX, the Warner Studio, and dumping the linear leftovers as well.
- Her response to critiques after the collapse of the share price: “I am mortified I got people to buy the stock… It’s been a decline since the beginning.”
She became tough on Zaslav, urging him to get moving on a complete restructure program rather than trying to rebuild the company as is.
Two days later, three analysts from Lightshed Partners published a piece labelling Ehrlich’s spinoff plans as “Stop with the WBD breakup nonsense”. Instead, they recommended that Zaslav kill MAX, revive HBO, abandon streaming ambitions, make great content to sell as an arms dealer, and maximize cash flow from legacy networks. Another forecast proven wrong.
There has been a Greek chorus behind these and other analysts echoing both sentiments. What the Ankler piece questioned was if some Wall Street analysts now see themselves as management. So what are investors, who have stakes in the stocks, to do? Lose money on the terrible calls of some highly regarded analysts? Jessica owned up to her mistakes. But many of her colleagues do not.
Ankler asked Rich Greenfield of Lightshed about the incorrect calls. He replied, “The goals are to be right more than wrong. Predicting the future isn’t easy, but we love stepping up to the bat and swinging…”
We thank Mr. G for enlightening us on what we’ve all known since elementary school, but we’re not so sure WBD holders feel any better. Holders who lost money on WBD may not share that sentiment. Greenfield’s opinion is undeniably the truth in many ways about the entire business of analyzing stocks. Investors are best guided to understand that clearly before buying or selling.
Originally, share analysis was a numbers game only for analysts who cast a flint eyed stare at the periodic performances and didn’t get into the deep dive critiques of operations. That’s part of the legacy of Warren Buffett’s mentor, Benjamin Graham (1894-1976). However, over the decades, as a monumental mass of data has grown, analysts have plunged in writing about what the company did vs. what the company should do, (myself included) on a stock.
Above: To be honest, few saw it rushing toward the dumpster.
I like to think of my commentary on SA as being partially rooted to a great extent in my decades of hands-on management experience in the sectors I cover. I’m sure there are others who call on industry know-how from prior career experiences as well. Others tend to just immerse themselves in any number of metrics to support their cases for action on given stocks they follow.
Varied approaches are consumed by investors. The question Ankler posed was this: Do some analysts’ calls on media stocks actually hit those stocks with excessive impact far above real-world impact? And how does Hollywood see it?
Ankler weighs in
Ankler interviewed a group of analysts and showbiz people to probe just how each felt about how influential analyst prognostications on policies influenced entertainment executives. The results were predictive. Some media people saw no influence about the process, others just shrugged. Overall, the media people see some analysts’ ongoing commentary edging into assumptions based on narrow interpretations of available data streams anyone can access.
Anyone can look up if a streamer gained or lost subs in a given quarter. So what does that mean over time? Subscriber rolls churn, much depends on content. And that is the crux of it, according to a legendary movie/TV producer friend who weighed in on the issue for me.
“Look, I agree that the system of analysts airing opinions and guessing outcomes cloaked in earnings calls is part of the game here. But when they tag content over time valuing IP assets, they are way above their pay grade. Or sometimes I read this or that analyst really getting into marketing or operational policy critiques, I’m dumbfounded. If you don’t understand how decisions are made in a very puzzling business to begin with, you have a problem”.
“Some of this analyst stuff is absolutely naïve, some of it is laughable, and some represents very good guesswork.”
“There was a time when studio executives thought this stuff was amusing. But now as Wall Street occupies such a recurring presence in the sector, there is nothing funny here. These big media folk follow the stock prices assiduously, especially those people with fat stock options. I don’t see Wall Street analysts playing the part of management as a core component of their value to investors. Let them just chop up the numbers – and compare, that’s their real value.”
Does Hollywood listen? On earnings calls, CEOs slant their comments to happy talk, avoid even toothless Q&A sessions with analysts.
Case in point: The streaming debacle
Ms. Ehrlich’s misreading of the future of the AT&T spinoff into WBD saw the stock drift down to $6.94, a huge collapse from the get-go. Not that Ms. Ehrlich’s peers have anything to pop buttons about themselves.
Paramount is at $10.25 even after the Skydance rescue deal has been signed.
Disney: August 2021 high of $200, nosedived since despite results of recent sub gains now at $85.96, with debt still at a 4.4X leverage.
WBD: Analysts still in the crossfire
Ms. Ehrlich has cut her rating on the stock since from buy to underperform.
WBD down drafts since 2022: 6XEV/EBITDA
2Q23 revenue $9.71b (-6.3% YoY miss)
EPS: Loss ($4.07) vs. YoY ($0.51)
All business segments down 5.8%
Net debt: ($38b) 4.0X
Analyst concerns: WBD lost the NBA rights deal to NBC. Some analysts saw this as a blunder for WBD, others applauded as game fees skyrocketed for a sport with a long-term decline in viewers.
Some analysts also argued that Zaslav has missed the opportunity to add exciting new content to MAX by feeding cash flows from linear into streaming units.
Conclusion
There appears to be growing sentiment among entertainment executives that Wall Street analysts have gotten too deep into the weeds on policy decisions. They can seem at times to be an ad hoc management review forum – after the fact.
Yet, there are others who see analyst content as influencing zero. Investors key in on numbers that produce earnings, period – some agree. Many see analyst reports that are uniformly positive, having a cheerleading chorus that can move shares higher. Agree. Like everything involved in stock picking, it requires a good gut. And that’s no different from the folks on the inside.
In the end, lost in the miasma of talk among the investors who lost a ton following Ms. Ehrlich’s rosy expectations for WBD, take a step back. It’s a process, proven over time, with strengths and weaknesses for all to see. We balance the billions undoubtedly made for investors from the deep dive analysis of stocks analysts recommended. And plunge underwater on many bad calls we support with our money.
On balance, it seems like the contribution of analysts overall has had a positive result for investors. We think, at least in this sector, investors are now smart enough to understand the profound truth of the Oscar winning legendary screenwriter William Goldman’s quote.
When asked by a fan, “How do you know what pictures will be a hit?”, he replied, “Nobody knows anything…” And that, more than anything, is the enduring truth of the entertainment business which investors are wise to keep in mind.
A summary of the Ankler article is free online.
Read the full article here