We came across a bullish thesis on Lions Gate Entertainment Corp (LGF-A) on ValueInvestorsClub by Novana. In this article we will summarize the bulls’ thesis on LGF-A. Lions Gate Entertainment shares were trading at $8.35 when this thesis was published, vs. closing price of $7.95 on Sep 18.
An employee at an entertainment retail storefront stocking new and pre-owned movies.
Lions Gate Entertainment (LGF-A) is a unique player in the entertainment industry, distinguished by its dual business model that encompasses both a premium subscription network, Starz, and a highly regarded content production arm, Lionsgate Studios. Founded over two decades ago, Lionsgate has built an impressive library of around 20,000 titles, which includes iconic franchises such as “John Wick,” “The Hunger Games,” and “Saw.” This extensive catalogue not only generates significant revenue—approximately $900 million annually from library sales—but also positions Lionsgate as a vital content provider for major streaming platforms like Netflix and Amazon Prime.
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The company operates in two distinct yet interconnected segments. Starz Networks includes the domestic STARZ service and the international Lionsgate+ platform, serving a combined subscriber base of approximately 25 million. Starz generates around $1.3 billion in revenue, with two-thirds of its subscribers accessing content via over-the-top (OTT) services. Meanwhile, Lionsgate Studios functions as a pure content supplier, capitalizing on its rich library and ongoing production of new films and series. This duality allows Lionsgate to tap into multiple revenue streams while leveraging its assets in a rapidly evolving media landscape.
Despite its impressive portfolio, Lionsgate has faced considerable challenges in recent years, including management missteps and fluctuating stock performance. The company’s recent strategic shift towards a full separation of its Starz and Studio segments presents a timely investment opportunity. Currently trading at approximately $9, the stock has seen a 13% decline since earlier short theses were published, which failed to recognize the evolving landscape and Lionsgate’s potential for growth. The risk-reward ratio now appears favorable, with a worst-case scenario projecting only a 20% downside, while a successful execution of the separation could see the stock double within the next 12 months.
Lionsgate has made significant strides to stabilize its operations, particularly within the Starz segment. After announcing a restructuring plan that included exiting unprofitable international markets, Starz has become cash generative, with OIBDA increasing from $81 million in FY2023 to an anticipated $200 million in FY2025. This turnaround demonstrates effective management and strategic focus.
The Studios division, often seen as the crown jewel of Lionsgate, has generated robust earnings, with OIBDA rising from $287 million to $330 million year-over-year. Analysts project further organic growth, supported by recent acquisitions, including Entertainment One from Hasbro. As Lionsgate navigates this transformative phase, it stands to benefit from a scarcity of independent studios in the market, enhancing its appeal to potential buyers and investors alike.
The forthcoming separation of Lionsgate’s businesses is critical to unlocking value. After successfully listing Lionsgate Studios as a separate entity, the company is poised for a full spin-off by the end of 2024. This separation is expected to create a clearer valuation for each segment, allowing investors to recognize the intrinsic worth of the Studios business, which could command a premium in a market hungry for quality content.
Ultimately, the investment thesis for Lionsgate hinges on its upcoming separation, which promises to debunk previous short narratives related to leverage and operational performance. With a solid foundation, proven content creation capabilities, and a path to clearer valuation, Lionsgate is well-positioned for significant upside. As the market embraces this transformation, LGF stock presents a compelling opportunity for investors looking for growth in a rapidly evolving entertainment landscape.
LGF-A is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 42 hedge fund portfolios held LGF-A at the end of the second quarter which was 38 in the previous quarter. While we acknowledge the potential of LGF-A as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as LGF-A but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.