Wells Fargo has resumed its coverage of media giants Netflix (NFLX) and Paramount Skydance (PSKY) following the months-long bidding war for the assets of Warner Bros. Discovery (WBD).
The research firm views the final outcome as a “pyrrhic victory” for Paramount and expects the Netflix stock to recoup losses in the days ahead.
Wells Fargo noted that the combined Paramount and WBD would generate much of its earnings from an increasingly challenged linear ecosystem and faces the crucial challenge of deleveraging while investing in an increasingly crowded video market.
“PSKY’s successful effort to capture WBD may leave equity holders in a precarious spot… While PSKY is stronger with WBD, shareholders are highly exposed to valuation… If PSKY derates (say on recession or AI), then equity holders get compressed,” the research firm said Monday.
However, they are optimistic about the streaming prospects of Paramount+ and HBO, which would make up about 3% of U.S. TV engagement time, still below Disney (DIS) and Netflix.
“We think culturally PSKY is creative-centric and will be an environment for HBO to thrive. The near-term risk is that combining the 2 services, which is what needs to happen to reduce churn, will also cannibalize some revenue,” Wells Fargo said.
On Netflix, the research firm believes the streaming pioneer will be aggressive with content growth and capital allocation, especially in sports.
“We viewed WBD as a form of accelerating content investment: save on future years’ spend by pulling it forward into 1 big deal for known IP + brands like HBO. Still, we think WBD was NFLX’s opportunistic Plan B, and now it’s back to Plan A: invest for growth,” Wells Fargo said.
With an NFL renewal upcoming, Wells Fargo thinks Netflix could go for 10-20 games per season at an annual cost of ~$500M to $1B.
Paramount was resumed at “underweight.” Before the rating restriction, Wells had assigned it “equal weight.” Netflix was resumed at “equal weight” and had an “overweight” rating prior to the restriction.
PSKY has a price target of $10, a 16.6% downside; NFLX has a PT of $105, a 6% upside.