With President Biden predicting 1.5 million daily COVID-19 vaccinations nationwide by mid-spring, the return of the domestic box office could be right around the corner. Wedbush Securities media analyst Michael Pachter believes the box office could “normalize” as early as July as vaccinations roll out, and virus infections/deaths decline.
“We maintain that most people will remain reluctant to attend the movies until they receive their vaccine, or in the case that the
transmission rate significantly falls,” Pachter wrote in a Feb. 22 note. “Simply stated, we do not expect attendance levels to begin to normalize until July at the earliest.”
Pachter contends AMC Theatres and Cinemark have taken the right precautions – installing high-quality air filtration systems, implementing enhanced cleaning and disinfecting protocols, reducing seating capacity, and block seating to preserve social distancing. Regal, which remains shuttered, has taken similar steps.
The analyst bases much of his optimism on the strong return of the Chinese box office — the second-largest in the world — which saw a major boost from a record Lunar New Year weekend with action comedy Detective Chinatown 3 opening to $393 million.
“Chinese box office bodes well for Imax, global theatres post-COVID,” Pachter wrote. “There was clearly pent-up demand in China as audiences returned en masse once theaters re-opened, and in Q4 Imax revenue was down only 4% YoY in the region. Through Feb. 14, Imax is trending up 471% from [the previous-year period].”
That said, Pachter estimates the Q1 U.S. box office is trending
down 93.6% through Feb. 21, with ticket sales down 88.1% year-over-year, and 2021 trending up 122.5% over 2020 (down 59% over 2019). More than 50% of theaters in major markets remain closed.
“We expect 2022 to return to 2019 levels on pent-up demand for long-delayed films,” he wrote.
Premium video-on-demand, the expensive version of transactional digital movie rentals offering consumers in-home early access to theatrical titles, continues to see a renaissance.
With 65% of major theatrical markets shuttered due to the pandemic, new data through Feb. 1 saw $19.99 PVOD releases Greenland (STX Entertainment), News of the World (Universal Pictures), Promising Young Woman (Focus Features), The Croods: A New Age (Universal/DreamWorks Animation), Our Friend (Gravitas Ventures) and Fatale (Lionsgate) rank among the Top 10 digital movies rented by consumers across Apple TV, FandangoNow, Spectrum TV and Google Play.
After a failed 2011 attempt by Universal Pictures to jumpstart PVOD by offering actioner Tower Heist directly in the home for $59.99, the distribution channel made a less-expensive ($19.99) comeback last year early in the pandemic when the studio disclosed it had generated $100 million in revenue from 5 million transactions in 28 days offering erstwhile theatrical sequel Trolls World Tour directly to consumers at home.
Thus, Universal took PVOD firmly by the horns, hammering out shortened theatrical window agreements with AMC Theatres and Cinemark in order to get its movies into home entertainment channels faster — and with good reason. Studios keep about 80% of all digital transactions, compared with 50% of theatrical.
“The results for Trolls World Tour have exceeded our expectations and demonstrated the viability of PVOD. As soon as theaters reopen, we expect to release movies on both formats,” said NBCUniversal CEO Jeff Shell.
Indeed, Universal released the Judd Apatow comedy The King of Staten Island on PVOD in June. It also rushed out early transactional VOD access to The Invisible Man, The Hunt, Emma and Never Rarely Sometimes Always, among others.
Other studios have tepidly followed, with Warner Bros. Pictures debuting Scoob! on May 15, and Disney launching Mulan into the home on Labor Day weekend — the latter initially as a $29.99 purchase-only option to Disney+ subscribers.
“The silver lining to 2020 from a theatrical perspective is that studios have had the opportunity to test the feared PVOD window, with the results not as compelling as many had expected, and not as damaging to the exhibitors as feared,” Michael Pachter, media analyst with Wedbush Securities in Los Angeles, wrote in a note.
Indeed, as PVOD has become normalized, scant information exists about actual sales generated by consumers. Nielsen recently announced it would begin tracking PVOD across living room televisions. Just released industry data from DEG: The Digital Entertainment Group did not include PVOD transactions among the $2.3 billion consumers spent renting movies and other filmed content through digital retailers in 2020 — up from less than $2 billion in 2019.
“We think that PVOD is here to stay, and it really is a big part of our business,” Fandango SVP Mark Young told a recent industry panel. NBCUniversal-owned Fandango operates transactional VOD services Vudu and FandangoNow.
Yet major theatrical distributor Imax believes PVOD remains a fluke driven by rollercoaster consumer behavior during a pandemic.
“To be unequivocal, PVOD is a failed experiment,” CEO Rich Gelfond told a virtual investor confab last September. “The numbers haven’t worked in a pandemic, so how would they work in a non-pandemic? Of the movies that were postponed, very few went into PVOD or streaming, and I should be clear I’m talking about the blockbuster movies — the movies that Imax does.”
Wedbush’s Pachter contends studios largely agree, continuing to postpone major releases into 2021 and later, showing they prefer a theatrical release over PVOD.
In the meantime, more movies are likely to go to subscription VOD platforms flush with cash and willing to spend it licensing content.
“We expect more films to shift to streaming as subscription services seek more video content after heightened consumption [and subscriber growth] coupled with several months of halted productions in the pandemic,” Pachter said.
When GameStop, the world’s largest video game retailer, started the year less than a month ago, its stock was trading around $19 per share — underscoring the market’s ongoing concern about packaged-media gaming in the digital age.
But that lull has been blown to pieces over the past few days as speculative at-home investors took to social media platform Reddit and began playing up the stock to some of the platform’s 3 million users. In the process, GameStop shares skyrocketed 1,700% to $347 per share, triggering mandatory trading stops by Nasdaq in an attempt to keep the stock, and the market, stable. The stock was up 8,949% (!) over the past 12 months.
“You combine the power of technology, which allows you … to magnify your individual impact, with some use of leverage and very targeted bets, they can have a significant influence, particularly on areas of vulnerability because of the short positions,” Jim Paulsen, chief investment strategist at the Leuthold Group, told CNBC.
GameStop shares sank early on Jan. 28 as trading platforms including Robinhood and Interactive Brokers restricted trading in the video game retailer. The stock opened at $265 a share and briefly rose to $483 before plummeting to $112. As of 11:45 a.m. EST the stock had rebounded to $225.
The frenzy has defied some Wall Street hedge funds and analysts unaccustomed to seeing day-traders on social media trigger a “short squeeze,” which occurs when a stock skyrockets quickly in value, forcing short sellers (including hedge funds) who had bet that the stock price would fall, to buy again in order to forestall even greater losses. It’s a cruel trading strategy magnified by “mob rule,” with some participants looking for paper wins at the expense of others.
“This is gaining cult-like status,” said Quincy Krosby with Prudential Financial. “It is a pack of traders and the pack is gaining momentum. The retail crowd is not just taking over the shorts and it’s taking over the headlines.”
Indeed, GameStop has been the biggest trending retail market story this week. Longtime video game analyst Michael Pachter contends GameStop is well-positioned to be a primary beneficiary of the new PlayStation and Xbox consoles from Sony and Microsoft, respectively. The video game industry concluded a record 2020 that saw revenue explode to $57 billion, with December sales up 25% due to the new consoles.
“We remain quite optimistic that [GameStop] will return to profitability by fiscal-year 2021,” Pachter wrote optimistically in a Jan. 11 note.
Fast-forward to the present and Pachter shakes his head at the craziness while maintaining a “neutral” rating on the GME stock he values at $19 per share.
“It’s just a feeding frenzy,” Pachter said in a media interview. “There’s nobody in this stock based on fundamentals.”
Indeed, recent fundamentals saw GME worldwide sales results for the nine-week holiday period, ended Jan. 2, increase 4.8% in comparable store sales and 309% in e-commerce sales. But total sales declined 3.1%, driven by an 11% decrease in GameStop’s store base due to a planned “de-densification” strategy, temporary store closures around the world due to pandemic-related government mandates, and lower foot traffic in stores.
“The guys buying [GME shares] at $300 think some greater fool will buy at $400, and so far the greater fools keep showing up,” Pachter said. “It’s a pyramid scheme.”
Sen. Elizabeth Warren (D-Mass.), a longtime advocate for stricter Wall Street regulations, says the uproar from institutional investors about GameStop trading is disingenuous in the face of the investment industry’s long history of questionable self-dealings and operating counter to actual economic concerns.
“For years, the same hedge funds, private equity firms, and wealthy investors dismayed by the GameStop trades have treated the stock market like their own personal casino while everyone else pays the price,” Warren said in a Jan. 27 social media post.
As expected, Netflix shares opened Jan. 20 up nearly 14% to a record $573.43 per share following the previous day’s 2020 fiscal report that underscored the the streaming behemoth’s market dominance. The service saw a record 37 million new subscribers, record revenue of nearly $30 billion and profit of $2.76 billion.
The SVOD topped 203 million paid subscribers for the first time, driven by a global market eager to consume content at home during the ongoing pandemic. Nowhere was that more prevalent than in North America — Netflix’s first and most-saturated market. The streamer added more than 850,000 subs in the U.S. and Canada — well above the projected 300,000+ subs.
“Importantly, while Netflix beat subscriber expectations in all major territories, Netflix’s most mature market U.S./Canada reported materially better than expected, which highlights that the ultimate penetration for Netflix’s services globally could be higher than anticipated,” analyst Jeff Wlodarczak with Pivotal Research Group wrote in a note.
Moving past the headlines, Netflix appeared to turn the page on what has always rankled some on Wall Street: free cash flow, or the cash left over after a company pays for its operating expenses and capital expenditures. Netflix historically has operated in the red, to the tune of $1 billion or more.
But in its fiscal 2021 guidance, Netflix said cash flow is moving toward a breakeven level at around $1 billion, an impressive turnaround driven in part by reduced spending due to the ongoing pandemic. Then the kicker: Netflix believes it no longer needs to raise external financing for day-to-day operations.
“Netflix has been working toward this moment for multiple years, and is now in the unique position to continue its aggressive content spend, while still generating significant future cash flows,” Jefferies analyst Alex Giaimo wrote in a separate note.
Longtime Netflix bear Wedbush Securities media analyst Michael Pachter, in a Jan. 20 note, said service “has consistently surprised us” by keeping its foot on the gas pedal for subscriber growth, while benefiting from a disruption in production to generate positive free cash flow.
“While we are far more constructive about Netflix than we have been at any point in nearly a decade, we continue to question its valuation,” Pachter wrote.
The analyst lauded Netflix’s pledge to be free cash flow positive through 2030. Rather than continuing to borrow to finance its content needs, Pachter said it has become clear that Netflix has reached a point where it can maintain a healthy balance sheet and finance operations from operating cash flow. He still contends the stock remains overvalued.
“We have been consistently wrong about Netflix, but optimism about the company’s potential to generate free cash flow growth of more than $1 billion per year seems to us to be misplaced,” Pachter wrote.
Netflix is projecting subscriber growth of six million for the fiscal period ended Dec. 31, 2020 — topping 201 million subs worldwide. Michael Pachter, media analyst with Wedbush Securities in Los Angeles, said he believes that tally will come in about 1 million less at 5 million, including 300,000 in North America, largely due to recent price hikes.
“We think this is likely given the price increase implemented in late October … [where] standard monthly subscription fees went to $14 from $13 and premium fees went to $18 from $16,” Pachter wrote in a Jan. 14 note. The analyst contends the price hike will up revenue to $6.6 billion from guidance of $6.57 billion.
The longtime Netflix bear notably marveled at Netflix’s ability to keep the content pipeline fresh during the pandemic when most production in Hollywood was shut down. Specifically, Pachter cites Netflix adding foreign content across markets, cross-promoting new genres to audiences, and purchasing/reviving dormant franchises such as “The Karate Kid” (“Cobra Kai”) and “Full House” (“Fuller House”), among others.
“Netflix’s experience in adapting foreign content to new markets has resulted in the company maintaining its content quantity lead over its competitors,” Pachter wrote. “We expect that lead to be sustained for the foreseeable future.”
If there was a silver lining during the pandemic, shuttered content production accelerated Netflix’s path to generating positive free cash flow — long a sore spot for Pachter. Free cash flow typically represents the cash a company generates after accounting for fiscal outflows to support operations and maintain capital assets. Pachter is guiding $2 billion free cash flow in fiscal 2020.
But the flush FCF could be quickly erased after Netflix announced production/distribution of more than 70 original movies in 2021 — enough content to release at least one new original movie every week.
“This is an ambitious and costly goal, particularly as the service is touting its ‘A’-List-driven content,” Pachter wrote. As a result, the analyst expects Netflix to reach break-even by fiscal year 2022 as content consumption normalizes, subscribers grow and content spend again ramps higher.
Netflix reports Q4 results at market close on Jan. 19.
A common theme throughout the pandemic has been Hollywood’s quest to supplant theatrical releases to wary moviegoers with direct-to-consumer home entertainment options such as premium VOD and digital retail.
PVOD got an early boost last spring when Universal Pictures reported it generated $100 million releasing Trolls World Tour direct to consumers in the early days of the pandemic. The move was eyed as catalyst to jumpstarting PVOD — a distribution channel previously considered dead. Since then Warner Bros. Pictures and Disney have released high-profile movies Scoob! and Mulan on PVOD — the latter initially only to Disney+ subscribers — with little mention of revenue generated.
“The silver lining to 2020 from a theatrical perspective is that studios have had the opportunity to test the feared PVOD window, with the results not as compelling for the studios as many had expected, and not as damaging to the exhibitors as feared,” Pachter wrote in a Jan. 11 note.
Indeed, Disney made Mulan available to consumers shortly after then Disney+ exclusive, followed by release on DVD and Blu-ray Disc. Scoob! bowed on disc on July 21, 2020 — two months after its May 15 PVOD release.
“Studios have opted to postpone major releases into 2021 and later, indicating that studios by and large prefer a theatrical release over PVOD, but will wait for a more normal environment,” Pachter wrote. “With that said, expect more films to shift to streaming as subscription services seek more content after heightened consumption coupled with several months of halted productions.”
While PVOD revenue remains largely a guarded secret by studios, the so-called “dynamic windows” ironed out between Universal Pictures, AMC Theatres and Cinemark, affording exhibitors a cut in digital revenue appears a better business model for all parties during the pandemic.
Under the deal movies with opening weekends over $50 million remain in theaters for 31 days (five weekends) and smaller films stay in theaters at least 17 days (three weekends), with a simultaneous theatrical/PVOD window for the remainder of the window (with downstream windows unaffected).
“We see the Cinemark-Universal model of to be the model on which most negotiations will be based in the coming months,” Pachter wrote. “We think this is the best solution for exhibitors, assuming the PVOD release is constructed as a revenue share between studios and exhibitors.”
With Warner Bros.’ Tenet generating $30 million at the domestic box office over two weekends, and Disney’s Mulan almost surpassed by a local sci-fi film (The Eight Hundred) at the Chinese box office, the jury remains out on the state of the theatrical market’s return to normal from the coronavirus pandemic.
The third-quarter domestic box office is trending down 96.8% quarter-to-date to $101.1 million compared with the previous-year period, as theaters nationwide only recently began re-opening — and at reduced capacity. The latest box office weekend was 89% lower than the comparable weekend last year, according to industry figures.
The sluggish re-start, coupled with a majority of screens still dark in major markets New York and California, suggests studios will reconsider bowing major new releases in any great numbers in the near future, according to Michael Pachter, media analyst with Wedbush Securities in Los Angeles.
Indeed, Warner just pushed back again the theatrical bow of Wonder Woman 1984 from Oct. 2 to Dec. 25 — more than a year after the sequel’s original launch date. Subsequent release dates included June4 and Aug. 14.
Sony Pictures Entertainment CEO Tony Vinciquerra last week told an investor event the studio would delay all major releases until 2021.
“What we won’t do is make the mistake of putting a very, very expensive $200 million movie out in the market unless we’re sure that theaters are open and operating at significant capacity,” Vinciquerra said.
Pachter says that trend will only grow as nervous studios contend with wary moviegoers and local government restrictions.
“We think the relatively lackluster second theatrical week for Tenet juxtaposed with the difficulty Disney has faced with Mulan has made film releases seem like a risky business in the current environment,” Pachter wrote in a Sept. 14 note.
The uncertainty is bound to increase pressure on studios to shorten the 90-day theatrical window and seek alternative distribution channels such premium and transactional VOD. The COVID-19 era has produced unusual circumstances (and opportunities) for studios, including dabbling in direct-to-consumer distribution.
The ongoing interest for at-home content could impact long-term decisions by studios regarding which content they send to theaters and which goes direct to streaming platforms, according to Pachter.
“This is particularly compelling for the studios that have launched or will soon launch their own subscription/ad-supported streaming video platforms,” he wrote.
Hollywood may be slowly going back to work as the coronavirus pandemic ebbs and flows across the country, but don’t expect a groundswell of content to be flooding distribution channels, including movie theaters and digital in the short term, according to Wedbush Securities analyst Michael Pachter.
Speaking Sept. 2 on the virtual OTT.X 2020 Summit, Pachter said studio and TV production across Hollywood has been at a standstill since mid-March due to the pandemic, which he said translates into exhibitors, pay-TV and over-the-top video distribution struggling to fill the void with fresh content.
At the same time, the analyst does not have high hopes for this weekend’s major new releases: Warner Bros.’ Tenet and Disney’s Mulan — the latter debuting Sept. 4 exclusively for $29.99 on “Premier Access” behind the Disney+ paywall.
Pachter said that despite AMC Theatres re-opening 70% of its domestic screens, COVID-19 worries among exhibitors will limit seating capacity, undermining the fiscal impact of Tenet from The Dark Knight director Christopher Nolan.
Pachter doubts the movie will generate more than $50 million at the weekend domestic box office, which begins Sept. 3. The film generated $53 million over a five-day (Aug. 26-30) period across 41 countries outside the U.S. and China.
The movie is projected to match last weekend’s international box office take with the movie opening in China, Russia, Serbia, Slovenia, Nigeria and Ghana. Domestic projections hover around $20 million.
The analyst said Tenet is getting distribution via 2,000 screens in the U.S., compared with 3,700 screens for Nolan’s most-recent major release, Dunkirk. Pachter said Tenet performed comparably to Dunkirk internationally, with the 2017 film generating $50 million its opening weekend in the U.S.
“Pent up consumer demand with 50% [social distancing seating] capacity and 60% of moviegoers afraid of dying [of COVID-19]. Yes, I think [Tenet] will be a [U.S. box office] embarrassment,” Pachter said.
Meanwhile, premium VOD, which has seen some studios (notably Universal Pictures) bypass theatrical distribution, delivering direct-to-consumer access to movies, generated a lot of attention after Universal’s Trolls World Tour sold more than $100 million digital transactions during the early days of the pandemic.
Disney, which has for years eschewed PVOD for the traditional theatrical window, surprisingly opted to distribute Mulan direct-to-consumer after the film’s repeated theatrical debut delays. Pachter questions how many consumers will opt to pay $30 for a movie they could arguably rent two months later for $5.99.
“Studios that are trying [PVOD] are just starting to figure out how a [direct-to-consumer] release impacts downstream revenue, and whether or not this will be worthwhile to use as a distribution method in the future,” the analyst said. “What may work well in the current [COVID-19] environment may not meet the same high-water marks in a normal environment. I think, generally speaking, most Disney films need the theatrical release to maximize profits, and I don’t see this changing.”
At the same time, the analyst remembered asking former Universal Pictures Home Entertainment boss Craig Kornblau why the studio didn’t offer a $30 monthly all-you-can-stream subscription plan similar to HBO.
“Why would we do that?,” Kornblau responded. “There aren’t that many movies.”
Pachter believes people would pay out of laziness, maybe watching 10 movies a month. But the analyst says studios are run by executives afraid of change and losing their jobs — not forward thinkers.
“That’s why guys like [new WarnerMedia CEO] Jason Kilar and [ex-TikTok boss] Kevin Mayer depart,” he said. “Maybe [Kilar will] convince AT&T CEO John Stankey to change.”
That said, Pachter has praise for upstart SVOD platform Disney+, saying the platform is inexpensive compared with Netflix and Amazon Prime Video, and filled with content suitable for the entire family. He projects Disney+ will reach 150 million subscribers, attracting lower-income households — driven in large part by the service’s catalog of more than 600 programs.
“Bundled together with ESPN+ and Hulu makes Disney+ a no brainer,” he said. “It’s wholesome content, Marvel stuff aside.”
As expected, Pachter has the most concern for Netflix in the COVID-19 era. A longtime bear on the SVOD pioneer, Pachter said Netflix is running out of original content.
“Netflix cannot stay on this hamster wheel without as much content as it had in the past,” he said. “Everybody that has content locked up will get [consumer] eyeballs. Netflix will lose eyeballs.”
Throughout the coronavirus pandemic Netflix has shattered the odds and competition attracting more new subscribers in six months this year than it did for the entire 2019. The service ended June with more than 190 million subs worldwide.
Retaining those subs is another story — and challenge. While subs flock to market pioneer Netflix in droves, keeping them entertained without a steady supply of fresh content is problematic in a COVID-19 era that has effectively shuttered or significantly slowed content production.
Michael Pachter, media analyst with Wedbush Securities in Los Angeles, says Netflix has very high levels of consumption per subscriber (an average of 30 to 40 hours per month pre-pandemic and likely 50 to 60 hours per month now). In contrast, most of Netflix’s competitors have much smaller subscriber bases (Disney+ at an estimated 75 million, Hulu at an estimated 35 million, and the other competitors significantly lower). While a high level of consumption is desirable, it drives a need to constantly replenish the content consumed, and Netflix’s extraordinary level of consumption multiplied by its large subscriber base suggests to Pachter that some meaningful percentage of subscribers will drop Netflix before a large quantity of new content can be produced.
Specifically, the analyst believes Netflix could lose upwards of 2 million subs per quarter going forward without a significant return to normalcy within the studio industry to create content. Netflix is projecting 2.5 million new subs in the third quarter (ending Sept. 30), while Wall Street is projecting 5.27 million.
“We suspect that this [sub decline] phenomenon has already begun and led to the company’s lackluster guidance for Q3 net sub additions,” Pachter wrote in an Aug. 24 note. “Once the pace of its delivery of new content begins to wane, we expect Netflix to see higher churn and much slower subscriber growth.”
While production slowdowns affect all streaming video services, with many operating on the studio coat tails of corporate parents, content shortages at NBCUniversal’s Peacock and WarnerMedia’s HBO Max are less severe due to their respective deep catalogs of content.
All of Netflix’s competitors are similarly disadvantaged. None will be able to produce content at a meaningfully faster pace than Netflix, and all streaming services will be challenged to produce new content for the first half of 2021. This is likely to create a competitive disadvantage for Netflix, Pachter says, given that the company’s library of owned content is relatively thin, while its competitors have been producing original content for decades.
“Of course, [Netflix] can bid for library content, but its competitors are similarly likely to bid on the same content, driving up the cost of library content and contributing to a return to negative free cash flow next year,” Pachter wrote.
Netflix ended Q2 free cash flow positive for the second consecutive quarter, at $899 million compared to negative $594 million in the previous-year period. Wall Street cares about free cash flow since it is a way of looking at a business’s finances to see what is available for distribution among all the securities holders, including investors.
Shares of Best Buy inched higher in early trading Aug. 24 as the nation’s largest consumer electronics retailer is set to release second-quarter financial results on Aug. 25.
Best Buy, which is one of the largest home entertainment packaged-media retailers, saw sales of DVDs, Blu-ray Disc, 4K Ultra HD Blu-ray movies, music CDs and related media increase 9.5% in the first quarter, ended May 21, compared with the previous-year period.
Best Buy continues to fill the need for stay-at-home consumers, in addition to remote-schooled children and college students.
Wall Street firm Raymond James upped Best Buy’s price target to a near market-high of $135 from $100. A price target is Wall Street’s estimation of the future price of a company’s security, which includes investment products, stocks and bonds.
“We believe in [Best Buy’s] fulfillment capabilities, high mix of essential items, and well positioned peer services should propel [chain] to gain further market share during the COVID-19 induced retail shakeout,” analyst Matthew McClintock wrote in a note.
McClintock believes Best Buy has ample liquidity to aggressively make investments in the near-term to drive future market share opportunities over the long-term.
Wedbush Securities media analyst Michael Pachter Best Buy’s management team has found innovative ways to exploit the favorable trends within the current work-from-home/learn-from-home/play-from-home environment.
“We applaud Best Buy for its many accomplishments, not least of which is achieving the difficult financial targets it has set for itself year after year,” Pachter wrote in a note earlier this year. “We now have more faith in its ability to successfully navigate this uncertain period.”