Summary:
- Comcast’s new film “Five Nights at Freddy’s” offers up a compelling template for the cable giant to exploit.
- Its success shows that day-and-date can work, but probably only for projects that can resonate with the TikTok generation.
- What that means is Comcast needs to figure out that formula and replicate it with an expert it is already partners with: Jason Blum.
- Comcast is a long-term buy in the media space whose dividend growth emphasizes income potential – this can balance out other speculative names in an overall media portfolio.
- The stock is most likely at fair value right now at best – consider it as it pulls back from the top end of the yearly range.
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Comcast (NASDAQ:CMCSA) had a great Halloween weekend. If there was a lesson to be learned, it’s that day-and-date releases can work…under the correct circumstances. (We’ll get to what that exactly means shortly.)
Considering that the cable giant’s linear business continues to shed video customers – down to roughly 14.5 million subscribers against 16.5 million subscribers in the comparable period, as of the recent Q3 report issued on October 26, 2023 – any time a piece of Comcast content does well at the box office, it’s reason to celebrate, since I believe filmed entertainment is something the company will have to greatly lean toward as the years go by to properly evolve into an increasingly competitive media conglomerate.
Problem is, as we’re discovering with the strikes, talent costs are nearly prohibitively expensive. Rises in residual rates will wreak havoc with the direct-to-consumer filmed-entertainment model.
That’s why media companies are turning to licensing content as opposed to having it just on their own streaming units – get a fee and take care of the residuals that way.
That’s also why advertising is being used – exploit that to create a dual-income stream for services.
Theatrical, however, has come back into vogue as a way of spreading risk of invested capital in films and episodic.
Comcast’s stock is a solid dividend play in the media sector for patient long-term investors. It is my expectation that the company will continue to use content through its NBCUniversal asset to drive value for shareholders, but there is also the risk that such content strategies may not pan out.
I’ll discuss risks/valuation at the end and will begin with the recent movie success and what it may mean going forward for the company.
Comcast’s Halloween Treat
NBCUni may have found success with Five Nights at Freddy’s, the latest teen-oriented horror piece forged from the partnership between Universal and Blumhouse Productions, but it was a bit scary at the beginning of October when the two entities underwhelmed shareholders with the reboot of the Exorcist franchise. Audiences did not feel possessed by that particular IP’s return to the marketplace: the film could only achieve a 60-handle on the domestic and international box-office gross, good for $120 million global as of this writing. Freddy’s turned out to be a big surprise to me; after five days at the domestic multiplex, it’s captured just under $90 million. International theaters are at $60 million, bringing the global take to almost $150 million. The film still has more of a run at theaters, so I expect these grosses to rise and really embarrass The Exorcist, which represented a significant investment of capital by Comcast’s content segment: the rights for the IP were reportedly purchased for $400 million, and according to this article, the details of what was actually purchased may be a bit complex (i.e., it may or may not have included budget lines, and it probably was for some brand-usage rights in the parks division). Assuming a good chance that the budget was not necessarily covered by that outlay, then we’re talking about a very disappointing ROI.
The company will probably learn from the reaction to the new entry and adjust accordingly (my advice: make the next one look and feel more like a Scream-type project with smart, snappy dialogue from an all-young cast to appeal to the Megan generation, even if that might alienate some longtime fans – for those horrified by such a suggestion, I hear you, just have my shareholder hat on at the moment). This is why I was worried about Freddy’s – seemed the marketplace might have lost some momentum in the horror space last month.
But an interesting thing happened. Even though Peacock was showing the picture at the same time as theaters, the crowds came out.
Granted, we might end up seeing some weakening of the box-office results as time goes on; certainly repeat business will be impacted.
We can still understand, though, how this benefits both Comcast’s multiplex and streaming businesses. The company reported 28 million subscribers for Peacock in the quarterly earnings missive, representing net additions of four million sign-ups. Comcast still expects losses of $2.8 billion for 2023, which it says will be the worst it will ever be. While that might be fair and believable (for now), the company would do well to aggressively cut costs and get to a profit sooner rather than later, but later, unfortunately, seems to be the case, as, right now, expectations are for continued losses in 2024.
Freddy’s can help promote the service while at the same time making money at the box office, but the problem for Comcast is replicability -you can’t have too many Exorcist failures going along with every success if you want to make any headway.
Jason Blum, the producer who knows how to do more with less, is perhaps the real star here. He’s brought a lot of horror projects to Universal, including Megan, which was also a social-media sensation; other younger-demo-targeted fare include Happy Death Day, The Purge and The Black Phone. The budget for Freddy’s is reportedly $20 million, as mentioned here. That’s a very reasonable cost, and while there is probably some significant profit participation with the project, Comcast should be able to mine value from what is sure to be a franchise startup (my advice to management: try to keep the cost at $20 million per film before participation; sacrifice some potential top-line box-office revenue in the name of profitability and risk-aversion; push Blum to do what he does best: create movie events based on concept and not overreaching capital investment).
Besides Blum, the other star here is Peacock, and the synergy the Comcast ecosystem is reaping from it. There’s even more opportunity, though, which I see for the advertising side of the discussion.
Yes, we are talking about theatrical and premium streaming primarily, but perhaps we should add to the mix commercial time. The great thing about release windows and linear-vs.-streaming is that all of it allows for maximal experimentation.
Here’s what I specifically mean: If Comcast wants to go day-and-date, it’s a risk, I’m sure we would all agree – concerns of cannibalized sales at the box office, to be precise. This movie paid off, but still – perhaps the deal should have been, even for premium subscribers to Peacock, that advertising would have supported the release on the service (and I would program a heavy ad load, at that). Call it a premium paid on top of a premium, if you will, but that would seem to, even in a subtle manner, make the two releases essentially different products – and that might help to sell theaters on the paradigm in the future. Disney’s (DIS) method of Premier Access – what the company branded its system of charging D+ subscribers $30 to see films just released to theaters – is probably more ideal, but trying advertising support is still worthwhile since data might indicate that it helps to reduce churn, given that those using Disney’s protocol might be more likely to hop on and then off (and I’ll add that I believe it wouldn’t be a problem for Comcast to offer ads to no-ad subscribers as long as it tags any such content as a differently-licensed product exception). Near day-and-date – which is releasing a film to streaming on a compressed window, maybe two or three weeks – represents a better balance in my opinion, and some have said it might have been appropriate for the Exorcist reiteration; perhaps that one should have hit Peacock on Halloween night. (Update: Right before I submitted this piece for publication, I read the estimate for Freddy’s second weekend: down about 80% to well under $20 million for domestic theaters; while the thesis that the movie performed well still holds, this significant downturn does support near day-and-date; I should concede that it was a higher drop-off than I anticipated, but the data collected from this release will prove valuable for future attempts).
Comcast should also specifically look to incubate new IP via day-and-date in case it wants to maximize theatrical profits over streaming promotion. This would involve taking a movie that perhaps would have been distributed only digitally on direct-to-consumer and/or transactional-video-on-demand and instead repositioning it for day-and-date for multiplex/Peacock. And this is where the aforementioned producer, Blum, could really come in handy – he has a knack for finding ideas that can be done relatively cheaply and then promoted to the TikTok generation. And he’s been doing that sort of thing for a while now – back in 2014, his Unfriended horror film, shot for about a million dollars reportedly, was originally supposed to be on cable television before switching to the silver screen and grossing over $60 million worldwide.
Universal too may have an even bigger advantage if it wanted to try to reproduce the Freddy’s formula: Blumhouse is supposed to merge with Atomic Monster, a content producer that is powered by James Wan, who brought The Conjuring IP to theaters, among other genre hits. One has to wonder if the relationship between Comcast and these two production companies will get even deeper (buyout someday? closer partnership with more access to Comcast capital?).
The bottom line is: The new Freddy’s film could cynically be labelled as capturing rare lightning in an unstable bottle, but, if the right project is matched with the right marketing campaign and the correct release date, then it would pay to be risk-on in using a day-and-date campaign to maximize value. The movie played well on social media, echoing other social-media offerings such as Megan and Smile, but such set-ups come attached with their own weird species of calculus that would most likely need new AI algorithms to fully understand – put another way, deducing the required initial conditions to convert something like the Exorcist failure into a meme-centered phenomenon is a difficult undertaking, and the next attempt, even if it looks like it can’t miss, could very well miss.
That’s why Comcast management needs to continue investing in this genre space – to learn as it goes, with the goal of creating a new formula and understanding it at the same time.
Valuation And Risks
I’ll start with the risks first. The big one: the fickle youthful demos bore Jason Blum and this genre space as a whole. That risk is real, and there will be downturns; longer-term, I see horror and rationally budgeted projects as good ROI bets.
Another risk is that Comcast is a story of a conglomerate with two major corporate personalities: one side is almost a boring utility trying to pivot away from linear cable into mobile and other offerings/services, while the other side is a content machine trying to learn the ropes of streaming to offset losses in multichannel-video-programming bundles.
Still another risk is that Comcast, a company/stock famous for its ability to commit to dividend growth in the media conglomerate space, no longer grows its dividend as well as it used to. This could come from any number of reasons, but most likely it would come from, in my opinion at least, not increasing the value it generates from the filmed-entertainment side as aggressively as it should (and the big risk on this side is cost of talent, something that doesn’t get as much coverage/analysis as it should).
Overall, though, I like Comcast’s chances in content and believe the company will continue to stem losses at Peacock and experiment with synergizing between its ecosystem and the multiplex.
On valuation, SA Quant currently rates the stock as an average one for the most part… maybe fair value to slightly expensive. The current 2.7% dividend yield is not bad for a media play… sure, 3% would be better in a rate environment like this one, but considering the company’s dividend history, one could argue this is a bit of a defensive equity.
As is sometimes the case with Comcast, the 52-week range is a tight one: $31 on one end and $47 on the other. As I write, the price is $43. This is obviously a good dividend play for patient investors willing to average over time, but I will say allowing for a further pullback from the yearly high would be a welcome move, especially considering Treasury rates.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of CMCSA, DIS either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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