An interesting contrast that became starker than ever in the last week is the divergence of fortunes between the “Old Media” companies (Disney, Time Warner, Viacom) and “New Media” companies (Google and Facebook). Each of these companies has now reported fourth quarter results for 2015 and given guidance for 2016 and the results and market reactions could not be starker. Facebook reported remarkable results on January 27, with their core advertising business accelerating sequentially and year over year despite the fact that the company was already growing revenue in the mid-40% range and despite the fact that the company had significant foreign exchange headwinds. Google reported on February 1 and similarly also showed revenue acceleration relative to the third quarter. What’s interesting is that when you contrast these to each of the results from the old media businesses, the story could not be more antithetical. Viacom shares sold off more than 20% after they reported declining advertising revenue on February 9 for the fourth quarter and also announced disappointing subscription revenue. Disney reported after the close on Tuesday and Time Warner reported yesterday and in both cases the television subscription portions of their businesses disappointed, with HBO and Turner subscription revenue falling short of expectations and in the case of Disney, cable network subscription revenue growing less than expectations.
Taking a step back and looking at the performances over the past year as shown in the above chart, the story is quite clear – investors are allocating capital away from old media and towards new media. To put some numbers around it, the three old media stocks have lost $55 billion in market capitalization over the last year cumulatively, while Facebook and Google have gained $73 billion and $107 billion, respectively.In addition, the old media stocks traded, unsurprisingly, at significant discounts to Facebook and Google a year ago, but still saw significantly more multiple compression over the past year. Specifically, the old media company multiples compressed by on average 35% over the past year, and the stocks now trade at an average 11.5x price to earnings multiple compared to Facebook and Google at 39x and 20x respectively. Investors have clearly placed their bets, and an excerpt from Steve Mandel’s Lone Pine Capital’s year end 2015 investor letter nicely sums things up:
“The internet remains the single most important and disruptive economic phenomenon in the world. It is transforming almost every sector of the economy. A few leading internet companies dominate the scarce real estate on the mobile web, a place where customers are flocking globally.”
Note: if you’re wondering why Google is the only stock in the above second chart that actually expanded its multiple over the last year, you should read the post located here from last year.
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