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Netflix’s current trailing price-to-earnings (P/E) ratio is 39.53 and its forward-looking P/E ratio (based on one year of projections) is 34.60. At the time of the launch of Disney+ in Q4 2019, its trailing P/E ratio was near 100 and in previous years had reached over 400 on a couple of occasions. The price-to-earnings ratio is calculated by dividing the market value price per share by the company's earnings per share (EPS).
Back then, Netflix was the standard-bearer for “the streaming multiple”, the bullish valuation of a P/E ratio promised by Wall Street in exchange for a promising roadmap for streaming subscriber growth. Wall Street rewarded Netflix’s stock price with high demand and a high price against low past and projected earnings because Netflix was consistently projecting long-term subscriber growth.
At the end of 2021 and in early 2022, that promise reversed course: Those companies that had failed to deliver their projected streaming growth—including Netflix but excluding Apple—saw their stock prices drop steeply. Netflix, in particular, saw its stock lose 70% of its value over a four-month period.
The message from Wall Street was clear: Ambitious growth projections no longer mattered and profitability was the new proof in the pudding. Today, recent signals have emerged that Disney and Warner Bros. Discovery believe that the streaming multiple can be revived from the dead. Perhaps even more surprising, the multiple seems priced into the deal terms for the complicated $8 billion merger between Skydance and Paramount.
Key Takeaway
If investors are not buying sales pitches for a "streaming multiple" for legacy media businesses—as Disney and Warner Bros. Discovery are painfully learning—why is that multiple baked into Paramount’s acquisition price for Skydance?
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WBD
Warner Bros. Discovery’s trailing and forward-looking P/E ratios are both currently negative because it has lost $675 billion over the trailing twelve months. Its stock price is down almost 30% year-to-date. Last Tuesday, Bank of America’s Jessica Reif Ehrlich and her team issued a report arguing the “current composition” of Warner Bros. Discovery “as a consolidated public company is not working.” The report emerged nine months after she had gently fileted management for attempting to sell investors that “growth and profitability from gaming and streaming [would] provide a cushion for the decline of the company’s linear networks.”
Warner Bros. Discovery’s C-suite has hoped that this sales pitch could reverse the negative trends for its stock price and recapture a “streaming multiple” for its digital media businesses. Instead, it earned them the very opposite outcome: A recommendation that they explore “strategic alternatives such as asset sales, restructuring and/or mergers would create more shareholder value vs. the status quo.”
Ehrlich argued it would be better to spin off all its linear assets into a separate holding company with an estimated $40 billion in debt. The Warner Bros. studios and direct-to-consumer assets would remain as a growth entity that would merit a higher P/E multiple. That path has its own challenges (especially bondholders who will not want a debt-ridden asset on the decline). Whatever will become of Warner Bros. Discovery now seems to be anybody’s guess.
Disney
Disney’s trailing P/E ratio is currently 103.72, suggesting that its stock has over 3.5x the value of its earnings per share in FY 2023 and therefore investors are more bullish on Disney’s future than Netflix’s. But, its forward-looking P/E ratio is a more conservative 17.30, which suggests they are less confident. The difference can be explained by a technicality: Disney has recorded impairment charges on its library ($1.5 billion in FY Q3 2023) and Hotstar India ($2 billion-plus in FY Q2 2024), thereby reducing its past earnings substantially. Lower past earnings reduce the earnings per share and therefore increase the P/E ratio.
Disney’s stock price has been flat since January, despite a bump to over $121 on April 1st, 2024. Disney’s stock has declined nearly 25% since then. Netflix has seen its stock rise 35% year-to-date and 6% since April 1st.
A recent Wall Street Journal article highlighted how Disney management is “focusing on improving its Disney+ platform into “a more Netflix-like streaming experience.” The objective is “to mitigate customer defections and generate more revenue from advertising sales.”
The Direct-to-Consumer business is barely profitable, generating $47 million in operating income in FY Q2 2024 after losing $2.5 billion in FY 2023. The company has just invested an additional $8 billion in Hulu via a buyout payment to Comcast and potentially more depending on what a third-party financial advisor ultimately decides.
Disney seems to hope this press coverage will assure investors that a more bullish P/E ratio is justified. If successful, Disney could reverse the negative stock price trend and convince investors that it is building a profitable growth engine for the future. In other words, a doubling of its forward-looking P/E ratio towards Netflix—which increasingly is perceived to be the market winner in streaming—would be justified.
But, as I wrote on Thursday, the Wall Street Journal story also exposed how aiming for Netflix may neither be an achievable objective for Disney’s Direct-to-Consumer division nor the optimal allocation of resources. YouTube is the more relevant competition. A Business Insider article published last Monday highlighted how YouTube Kids and Netflix combined now capture over 33.5% of TV viewing among children 2 to 11. Disney only captures 7.9%. The business case for a Netflix-like P/E ratio for Disney seems out of reach over the long term.
Paramount & Skydance
Given the above, the logical question is why a streaming multiple seems to be baked into Paramount’s acquisition price for Skydance. The complex deal is structured so that the Ellison family and Redbird Capital buy National Amusements Inc. for $8 billion and as part of that deal, Paramount will acquire Skydance for $4.75 billion payable in Paramount shares.
That price tag seems hefty. According to The Wall Street Journal, Skydance is projected to make just over $1 billion in revenue in 2024, with earnings before interest, taxes, depreciation and amortization of $90 million. The company expects a huge surge in 2025 to $2.29 billion in revenue and $322 million in EBITDA.
A price of $4.75 billion is 52x Skydance’s 2024 EBITDA and 14x its projected EBITDA in 2025. There are no available projections beyond 2025. Both the trailing and forward multiples are expensive for any business without Netflix's intellectual property or proprietary technology or without Disney's theme park business.
Like Disney, Skydance promises it will build a Netflix competitor by improving algorithmic recommendations on its existing streaming service to boost engagement and reduce churn. The technology aspect is promised to be solved by Oracle’s involvement in the deal—$6 billion of the $8 billion deal is being financed by its Chairman Larry Ellison, the father of Skydance founder David Ellison— for “Paramount to be able to expand its technological prowess to be both a media and technology enterprise.” But, we do not yet know what Oracle’s technology contributions will be or how they will improve Paramount+.
High Stakes For Shareholders
Paramount shareholders have insufficient evidence to swallow a forward-looking, Disney or Netflix-level P/E ratio for Skydance without more clarity on that. Major Paramount shareholder Mario Gabelli—who owns both classes of shares—has filed a request for more information on the deal in Delaware’s Chancery Court.
So, the question is why the “streaming multiple” seems to have re-emerged in the deal terms for Skydance’s complex acquisition of Paramount. Outside of Oracle’s involvement, it would be a stretch to argue that Skydance with its limited assets should merit a higher trailing P/E multiple than Netflix, a higher forward P/E multiple than Warner Bros. Discovery or a nearly equivalent one to Disney’s.
Paramount shareholders evaluating the proposal—which also includes Paramount Class A shareholders (of which NAI is the majority shareholder) being bought out at a premium ($23 per share) to Paramount Class B shareholders ($15 per share)—face the difficult task of investigating whether this streaming multiple is included in their share price, and with only a 45-day window to do so. Other details on the deal, including terms that Shari Redstone received, are sketchy. These are key reasons behind Gabelli’s filing in Delaware.
The worst-case scenario for Paramount shareholders would be for the “streaming multiple” to re-emerge in the pricing of Skydance for questionable reasons and also not apply to the valuation of their share prices. That reads like a scattershot and selective application of the “streaming multiple”. But, the real question is why the “streaming multiple” is re-emerging in the Paramount deal when the broader marketplace no longer sees any rationale in applying it.