Fox (NASDAQ:FOXA) shares fell nearly 2.5% in pre-market trading on Monday as investment firm Wells Fargo downgraded the media company, citing risks from cord cutting and its news business.
Analyst Steven Cahall lowered the firm’s rating on Fox (NASDAQ:FOX) to underweight from equal-weight, noting that the company’s earnings mostly come from Fox News, which he says is facing “viewership and share pressures.”
“With ecosystem risks also elevated we find our estimate outlook more negative and below the Street,” Cahall wrote in an investor note.
Delving deeper, Cahall said he now believes Fox News has an enterprise value of roughly $11B. He values it 5 times EV/EBITDA, down from a previous estimate of 6 times due to worries of a “structural decline” in cable news viewership from cord cutting and demographics, as well as worries about talent departure and increased competition.
“We are also not convinced that cable news works well in streaming, so our 8% view on annual cord cutting presents ongoing earnings risks,” Cahall added.
Cahall values Fox Sports at 4 times EV/EBITDA and the company’s national FOX broadcast network and its owned and operated stations at 7 times EV/EBITDA.
Despite the concerns about the linear business, Cahall likes Fox-owned Tubi, given it now has roughly 61M monthly active users and revenue is growing at 31% year-over-year. He estimates that any diverstiture or spin-off of the business could boost Fox’s (FOXA) stock.
Analysts are universally cautious on Fox (FOXA). It has a HOLD rating from Seeking Alpha authors, while Wall Street analysts rate it a HOLD. Conversely, Seeking Alpha’s quant system, which consistently beats the market, rates FOXA a HOLD.