Fox Corporation's Investment Appeal: Unpacking Valuation, Ownership, And Digital Strategy

Fox Corporation (NASDAQ:FOXA) has undergone notable leadership and strategic direction changes. The transition from Rupert Murdoch to Lachlan Murdoch could affect the company's future trajectory. In my view, leadership changes often bring about shifts in corporate strategy, and given Rupert's significant influence in the industry, Lachlan's approach will be keenly observed. FOXA has demonstrated adaptability by effectively integrating traditional broadcasting methods with modern digital platforms. This adaptability, coupled with solid financial metrics, suggests a stable foundation. I believe that FOXA's business prospects and seemingly cheap valuation indicate a positive outlook for potential investors.

Business Overview

FOXA specializes in news, sports, and entertainment. It functions across three segments: "Cable Network Programming," producing and licensing news and sports; "Television," handling content production and multi-platform distribution; and "Other, Corporate, and Eliminations," encompassing the Fox Studio Lot and Credible, a consumer finance platform. With Rupert Murdoch stepping down recently, his son Lachlan is set to lead. Given Rupert's profound industry impact, this shift is pivotal. Yet, it's possible that Lachlan's direction might offer a renewed approach, potentially bolstering Fox's market position and diversifying revenue sources.

Fox Corporation, founded in 2018 and based in New York, became an independent publicly traded company in March 2019 after parting ways with Twenty-First Century Fox, Inc. and following Disney's acquisition of many of its key assets. Fox delivers content primarily through its flagship networks, Fox News Media and Fox Sports. The company's emphasis on live "appointment-based" content, tailored for real-time viewing during events such as sports games or news segments, is a strategy I believe resonates deeply with traditional audiences. This approach not only captures the attention of viewers but also cultivates a communal experience. I think such a strategy will likely enhance viewer loyalty and engagement. Additionally, Fox extends its reach by offering TV and film production services through its Fox Studio Lot and manages Credible, a distinguished consumer finance platform. I think Fox's autonomy since its separation has provided it with a fresh strategic vision, positioning it strongly in the ever-shifting media industry.

Fox Corporation's strategy melds traditional and digital media, which appears prudent amidst evolving consumer preferences. Their investments in Fox Nation, Fox Weather, and the extension of rights with the Big Ten Conference, coupled with the USFL's expansion, signify meaningful digital and live content diversification. The venture into new co-productions denotes a shift towards self-reliance, which, I believe, could potentially harbor more control over revenue streams. Moreover, Tubi's addition of over 100 new titles and close to 250 channels demonstrates a successful stride toward digital engagement. I believe these strategic initiatives are well-aligned to bolster Fox's market position by broadening its content spectrum and digital footprint.

A slight subscriber decline from 2022 to 2023 in the Cable Network Programming segment suggests challenges in retaining traditional audiences. Yet, digital distribution via Fox-branded platforms and ventures like USFL and Outkick Media show an adaptive approach to engaging a modern audience. This mix of traditional and digital could be crucial for Fox to sustain audience engagement and advertising revenue amid changing viewership trends and fierce competition from various platforms.

Segment Analysis and Recent Performance

Fox Corporation's Television segment also mixes traditional broadcasting and digital platforms to promote sustainable growth amid changing content consumption trends. Owning 29 stations in key markets, reaching 38.6% of U.S. T.V. households, strengthens their broadcast reach, while digital efforts via Tubi AVOD show adaptability to evolving viewer tastes. Their move towards the ATSC 3.0 "NextGenTV" standard indicates a progressive tech adoption. Furthermore, FOXA adeptly engages the coveted 18 to 49 demographic, particularly zeroing in on 18 to 34-year-olds, through a potent blend of sports and entertainment in its primetime lineup. Its strategic alliances with the NFL and MLB significantly bolster its sports programming. By melding traditional broadcast with digital realms through Tubi, Fox showcases an adaptive approach to changing viewership trends. I believe this integration not only diversifies content delivery but could potentially draw a younger audience, a move that may be pivotal in sustaining viewer engagement in a rapidly evolving media landscape.

The Other, Corporate, and Eliminations segment highlights varied assets like Fox Studio Lot's dual revenue from lease and production services. Fox Corporation leases office space on the Fox Studio Lot to Disney until 2026, showcasing another facet of their ongoing interaction. Investing in Credible extends Fox into consumer finance, aligning with Tubi Media Group's digital goals. Fox's involvement in Flutter and a substantial option in FanDuel show foresight in online sports betting, with a notable $4 billion option price indicating a significant future financial commitment, marking a measured yet bold venture into a digital, consumer-focused realm.

Fox Corporation's unaudited statements for Q1 2023 reveal a revenue jump to $4.084 billion from $3.455 billion in Q1 2022. However, a concerning shift occurred: a net income of $283 million turned into a $54 million loss. I believe this is primarily due to ballooning operating expenses, especially the 'Other, net' category, which surged from $233 million to $719 million. This spike, linked to defamation lawsuit payments to Smartmatic and Dominion, has overshadowed the revenue gains. Furthermore, the balance sheet shows dwindling cash reserves, down to $4.146 billion from $5.2 billion, while receivables rose.

Valuation and Financial Perspective

Fox Corporation's fiscal 2023 showcased a 7% revenue growth, underpinned by its blend of traditional broadcasting and digital platforms, notably Tubi AVOD, which reported a 79% surge in consumption. This growth, combined with a 12% rise in advertising revenues, particularly a 17% increase in the television segment, reflects Fox's adaptability in the media landscape. The company's move towards the ATSC 3.0 "NextGenTV" standard and Tubi's 47% revenue growth in Q4 emphasize its innovative approach.

FOXA's ownership structure is central to its valuation. FOXA signifies Class A shares, which lack voting rights, while FOXBY, an ADR for Class B shares, offers voting privileges. This setup allows FOXBY shareholders to influence company decisions, a privilege not extended to FOXA shareholders. The Murdoch family exerts significant voting power by controlling Class B shares, rendering Fox Corporation a controlled entity. I believe the recent leadership transition, with Rupert Murdoch stepping down and Lachlan Murdoch taking the helm, could usher in fresh strategies for Fox. This shift, combined with Fox's strong financial standing and strategic moves, suggests a promising future. The company's $2 billion share repurchase and dividends in fiscal 2023 underscore its confidence. And I think that with FOXA's solid balance sheet and the Murdoch family's experience, FOXA's business fundamentals remain promising in the media industry.

For my valuation model, I anticipated FOXA's growth rate of 7.7% up to 2024, reflecting its revenue CAGR since 2016. Post-2024, I've projected a more moderated revenue growth to maintain a conservative stance in my estimations. I've also factored in a consistent EBIT margin of 20.7%, aligning with the average observed since 2016. While most figures are grounded in historical averages, it's worth noting that for FOXA's NOWC, I've projected a gradual cash increase over time. However, FOXA's NOWC has remained fairly steady, showing a marginal decline of about 0.3% relative to total revenues annually. Regarding discounting the projected FCFs, I've applied the CAPM's recommended discount rate of 8.9%. I believe the assumptions underpinning this valuation model lean towards a conservative side, ensuring a balanced and objective financial forecast.

As you can see, my valuation model indicates that FOXA is considerably undervalued, with an estimated equity value of approximately $27.65 billion, suggesting an 89.2% potential upside from its current position. This leads me to believe that FOXA is a compelling buy up to $59.30 per share. While the stock's undervaluation was unexpected, it's essential to note that FOXA, as a controlled company, may warrant a small discount. However, even after accounting for such factors, the current price justifies an investment, leading me to rate FOXA as a "buy." Fox Corporation's prominent presence in major US markets and strong financial foundation promote revenue growth and profitability. I think their emphasis on live sports and primetime entertainment is promising, given the high viewership these segments attract, which could amplify advertising revenues. I believe FOXA's financial stability, marked by consistent revenue growth, suggests it'll continue delivering shareholder value.

Conclusion

FOXA has demonstrated a capacity for adaptability in the media sector, particularly through its blend of traditional and digital media. This combination, supported by its stable financial position, allows it to navigate the dynamic media landscape effectively. The recent leadership change to Lachlan Murdoch suggests a possible evolution in FOXA's strategic direction, which could influence its future market positioning. Based on my valuation model, FOXA appears undervalued, suggesting an 89.2% potential upside. This undervaluation makes FOXA an attractive investment opportunity. This perspective is further reinforced by the company's consistent financial performance and growth prospects, indicating its potential to continue offering value to shareholders.