Shares of Paramount Global and Warner Bros. Discovery Inc. took a hit Friday after they were downgraded at Wolfe Research because of increasing concerns that advertising spending would fall.
Wolfe’s Peter Supino said the risk for TV advertising has always been steepening declines in ad spending. “Advertising revenue being almost pure profit, faster declines savage profitability,” Supino wrote in a note to clients.
With that in mind, Supino said his recent industry checks suggest that upfront spending by advertisers, or spending before the new TV season begins, will fall “well short of expectations,” with potential for the first rollback in pricing in over a decade, excluding the effects of the COVID pandemic.
As a result, Supino cut his rating on Paramount
PARA,
to underperform from peer perform, and lowered his Warner Bros.
WBD,
rating to peer perform from outperform, saying he is “increasingly concerned” that the steepening decline phase has begun.
The shares of both Paramount and Warner Bros. fell 0.5% in morning trading to buck the gains seen in their peer group, as the Communication Select Sector SPDR exchange-traded fund
XLC,
rose 0.2%.
“In general, the upfront appears to be off to a very slow start, pacing about a month behind normal years,” Supino wrote.
At the same time, he said networks are looking for near-record pricing, with increases of more than 15% from a year ago to offset ratings declines in the low-to-mid teens percentages, while ad buyers want pricing to fall.
Over the past three months, Paramount’s stock has tumbled 24.3% and Warner Bros.’s shares have shed 16.6%, while the communication ETF has rallied 11.0% and the S&P 500 index
SPX,
has tacked on 7.5%.
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