GameStop Opens Lower Following Mixed Financials

The day after world’s largest video game retailer GameStop posted mixed second-quarter (ended July 30) financial results, company shares trended down during early Sept. 9 trading.

Despite a retail footprint of thousands of stores, GameStop rebooted its senior management team, incorporating a team of e-commerce experts led by new chairman Ryan Cohen, founder of Chewy.com. The company is in the process of transitioning from physical retail to technology and online gaming.

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Cohen & Co.’s ascendancy has been fueled in part by crowdsourced-investors looking to manipulate GameStop shares for short-term gains. The strategy has worked thus far, with shares up 860% year-to-date based largely on non-business fundamentals. Quarterly revenue topped $1.18 billion, above an industry estimate of $1.12 billion.

Regardless, GameStop management conducted no Q&A during its Sept. 8 fiscal call — the second consecutive fiscal period it has done so.

As a result, much of the established Wall Street investment community has abandoned GameStop, except Wedbush Securities game expert Michael Pachter. The analyst questions when Cohen will live up to his hype.

“I am waiting for his brilliant strategy, and it’s not going to be brilliant,” Pachter told Yahoo Finance. “If it was brilliant, then he would have let us know, months and months and months ago. [Cohen] is trying to revolutionize an industry that has already passed him by. He’s audacious, and he’s wrong on this one.”

Analyst: 2021 Box Office Trending Up From 2020, Down From 2019

The recent domestic box office success of Paramount Pictures’ A Quiet Place Part II and Universal Pictures’ F9: The Fast Saga has jumpstarted the exhibition business, with theater operators on track to see 2021 revenue increase 120% from pandemic-addled 2020, according to media analyst Michael Pachter.

Year-to-date revenue has topped $1 billion, which is down about 41% from 2020, but the gap is expected to close and ultimately surpass last year’s tally as the year progresses with the debut of Disney/Marvel Studios’ Black Widow, among others.

Michael Pachter

The Wedbush Securities analyst, in a June 29 note, said the current month’s box office receipts of $368 million represent “a vast improvement” from the $4 million in ticket sales North American theaters mustered during June 2020.

Pacter said that while the vaccine rollout and a steady stream of summer blockbuster movies portends a strong industry rebound, the month’s revenue is still 68% below June 2019 box office receipts — underscoring the long path toward normalization theaters face.

Then again, the 2019 box office was an outlier as Disney alone generated a record $13.2 billion in revenue on the back of its expansive Marvel/Lucasfilm/Pixar IP portfolio.

“We expect [publicly traded exhibitor] shares to mostly trade higher this week after a reassuringly strong opening weekend for F9,” Pachter wrote. “While there was some additional release slate movement by Warner Bros. late last week, this appeared to be typical shifting to maximize profitability against competing releases, and not related to studio concerns about attendance trends.”

Warner last week pushed back again the release of big-budget sci-fi movie Dune to Oct. 22 from Sept. 22. The studio moved up to Sept. 17 Clint Eastwood’s Cry Macho, while “The Sopranos” prequel, The Many Saints of Newark, now fills the Oct. 1 slot.

Pachter cautioned that the exhibition business remains volatile dealing with merger and acquisition scuttlebutt, COVID variants gaining steam, and competing streaming services.

“There is plenty of theatrical content originally slated for 2020 to fill the 2021 release slate and spill over into 2022,” Pachter wrote. “However, streaming services are competing at the highest levels for content to bolster their offerings in an extremely competitive environment as content was consumed at heightened levels throughout 2020. [This trend] has continued through the first half of 2021.”

Analyst: Netflix Paying Sony $1 Billion For Movie Rights

Netflix’s big distribution deal with Sony Pictures for exclusive streaming access to new theatrical and original-produced movies beginning in 2022 is expected to cost the SVOD behemoth more than $1 billion, according to media analyst Michael Pachter. Netflix and Sony did not disclose financial details of their landmark agreement, which supplants Sony’s long-time distributor (since 2006) Starz.

“This is meaningful for Netflix as many of its earlier exclusive licensing deals have expired, the content pulled back by studios such as Disney and WarnerMedia seeking to shore up their competing streaming services,” Pachter wrote in an April 12 note.

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The agreement comes as other studios pull content from Netflix for proprietary services. MGM-owned Epix and MGM have opted for an exclusive partnership with Paramount+, while NBCUniversal is considering pulling content from both HBO Max and Netflix to shore up its Peacock service, while potentially leaving some of its content available to co-owned Hulu on a non-exclusive basis.

“While these are clearly exceptional times and exhibitors are willing to negotiate terms they typically would not have in a pre-COVID environment, we think these types of negotiations will continue, and we expect to see more original content from streamers playing in theaters post-pandemic,” Pachter wrote. “We think exhibitors are now more willing to negotiate favorable terms with far more flexible windows than they had in the past, as long as their counterpart is willing to pay.”

Indeed, the analyst contends Netflix acted proactively as studios continue to hold back major tentpole titles due to the pandemic. With many lower-budget movies slated for release last year shifted to streaming to recoup production budgets, most larger budget titles have been pushed back to later this year or into 2022. Despite the expected July 9 theatrical bow of Disney/Marvel’s Black Widow, and exhibitors in some markets, including Los Angeles, expanding seating capacity to 50% from 25%, Pachter says the exhibition industry is not expected to “normalize” until this summer at the earliest as more moviegoers get vaccinated.

“Attendance levels will not materially improve until tentpole titles return to theaters, and studios clearly prefer the lower risk of releasing tent-pole titles when vaccine s should be widely distributed in the U.S. and Europe,” wrote the analyst.

Analyst Predicts 1 Million Fewer New Q4 Netflix Subscribers

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.

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“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.

 

Analyst: Lackluster Weekend Box Office Could See Studios Further Delay New Releases

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.

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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.

 

Analyst: Netflix Could Lose 2 Million Subs Quarterly Without New Content

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.

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Michael Pachter

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.

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“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.

 

Best Buy Stock Up Ahead of Quarterly Fiscal Results

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.

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“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.”

Netflix Bear Analyst Eyes 15 Million Q2 Subscriber Growth

Wedbush Securities media analyst Michael Pachter has long rebuffed conventional wisdom when it comes to Netflix. The Los Angeles-based analyst steadfastly considers the streaming behemoth’s excessive use of free cash an underling weakness in the Netflix story.

Free cash flow is often considered an important measurement since it outlines how effective a company is at generating enough cash after funding operations and capital expenditures to pay investors via dividends and share buybacks.

Netflix has consistently been in the red with available free cash, with Pachter projecting $1 billion negative FCF for the SVOD pioneer in the 2020 fiscal year.

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But following a July 10-12 survey panel of 1,315 Americans on their current streaming and cable subscriptions, Pachter contends Netflix’s FCF situation is improving — albeit in the short term.

Michael Pachter

The analyst found that 50% of respondents cite Netflix as their favorite service, with 8% signing up for the first time in the past 90 days — a similar percentage of newbies resisted in Pachter’s previous survey in March.

“[It] suggests continued robust subscription growth,” Pachter wrote in a July 14 note.

Indeed, the analyst believes Netflix could report net sub additions of 15 million worldwide — up from Pachter’s estimated 7.9 million net sub additions. More importantly, the outsized sub growth could see a $250 million lift to FCF for the year.

“This would improve our estimated [Netflix FCF] loss of $1 billion (in-line with guidance for a $1 billion loss or better) to $750 million,” Pachter wrote, who added the improved economics portend other issues.

“We think the likely giant spike in new subscribers increases pressure on Netflix for retention.,” he wrote. “More consumption of content suggests even greater need to replace content with something new, and we expect spending and negative free cash flow to return to 2019 levels in 2021.”

Netflix reports second-quarter fiscal results July 16.

Analyst: Box Office Trending Down 71%

Despite optimism on behalf of some national theatrical chains, the 2020 box office continues to be hammered by the effects of the coronavirus pandemic mandating closure of most screens in the United States and worldwide.

New data from Wedbush Securities in Los Angeles contends the box office through the first half of the year is down 71% from the same period in 2019 — a trend that won’t improve anytime soon as studios further delay new releases due to ongoing spikes in COVID-19 infections.

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Indeed, the second-quarter box office flatlined down 99.9% year-over-year to $3.69 million, compared with Wedbush’s most-recent estimate down 99.4% year-over-year, as most domestic theaters remained closed throughout the quarter.

While major chains such AMC Theatres, Regal Cinemas and Cinemark are eyeing qualified return to normal with Warner Bros.’ Tenet on Aug. 12, followed by Disney’s Mulan on Aug. 21, senior media analyst Michael Pachter believes consumers will remain reluctant to frequent cineplexes until their is a virus vaccine or downturn in infections.

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“While there are clearly many who are eager to return to some level of normalcy, there are still many more who we think will remain reluctant to attend the movies before there is a vaccine, or if the transmission rate falls significantly before then,” Pachter wrote in a note. “Simply stated, we do not expect attendance levels to begin to normalize until the end of the year at the earliest.”

Regardless, AMC reportedly has staved off possible bankruptcy in a deal The Wall Street Journal reported with a private equity group.

Analyst: Studios, Exhibitors Will Shrink Theatrical Window

With the success of Universal Pictures’ PVOD release of Trolls Word Tour, and the studio’s plan to distribute future theatrical feature films concurrent with digital retail, Wedbush Securities media analyst Michael Pachter contends a compromise between studios and exhibitors resulting in a shorter theatrical window is coming.

With studios reportedly making 80% on a movie’s digital release compared with 50% for theatrical, the incentive to go direct-to-consumer is financially appealing. At the same time, theatrical revenue and home entertainment marketing for major movie franchises such as “Fast & Furious,” “Star Wars,” “Mission: Impossible,” “James Bond” and “Spider-Man,” among others, is immense.

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Universal’s next major PVOD release, The King of Staten Island from director Judd Apatow, is slated for June 12. And Disney is expected to release smaller movies on its Disney+ SVOD platform.

“We very much believe in the value of the theatrical experience,” Disney CEO Bob Chapek said on the recent fiscal call. “But we also believe that either because of changing and evolving consumer dynamics or because of certain situations like COVID, we may have to make some changes to that overall strategy.”

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Pachter said he views Disney’s tepid approach to transactional VOD as limited in the long-term. He says Disney’s switch will spark further debate and negotiations on the existing theatrical windows and revenue share agreements.

“What we expect is that the exhibitors will make some small concessions on the windows or revenue share for these smaller films that would otherwise go to PVOD, so that all parties can maximize profitability, but the exhibitors cannot bend on simultaneous releases or they will go out of business,” Pachter wrote in a June 8 note. “The studios do not have any incentive to push the exhibitors out of business, and we believe that a mutually beneficial arrangement can be found before the studios begin releasing new content to theaters later this year or in 2021.”