News Corp Shares Dip to 12-Month Lows: Is Now the Time to Buy?
Last week saw News Corporation (ASX: NWS) shares tumble to a new 12-month low, a surprising development given that the company’s first-half financial results actually surpassed analyst expectations for both revenue and earnings. So, what’s behind this stock market stumble?
The primary driver appears to be News Corp’s significant 61% ownership stake in REA Group Ltd (ASX: REA). REA Group’s shares experienced a substantial drop on Friday, despite reporting what were considered reasonable financial outcomes. This drag on its major holding has evidently weighed on News Corp’s own share price, which, while showing a slight recovery today, remains near its recent lows. This situation prompts a crucial question for investors: does this dip in News Corp’s share price now present a compelling value opportunity?
Broker Insights: A Mixed But Generally Positive Outlook
Leading financial institutions have recently released their analyses of News Corp, with both UBS and Macquarie Group suggesting that the shares are currently undervalued.
Macquarie Group’s Perspective:
The team at Macquarie has set a price target of $44.40 for News Corp shares. When factoring in the company’s modest dividend yield, they anticipate a total shareholder return of approximately 16.4% over the next 12 months.
Macquarie noted that News Corp’s recent financial report exceeded expectations in key areas, including revenue, EBITDA, and net profit. They also highlighted a continued improvement in the company’s overall profitability.
- US Real Estate Business (Move/Realtor.com): Macquarie pointed to positive developments in News Corp’s US real estate segment. Move, the operator of Realtor.com, is reportedly achieving “modestly break-even EBITDA.” With an improving market backdrop, Macquarie expressed increased optimism regarding the potential for earnings recovery in this division.
- Dow Jones Division: The Dow Jones segment delivered its strongest quarterly revenue growth in nearly three years, a performance that also outpaced forecasts.
However, Macquarie also outlined some key considerations:
- Reliance on REA Group: A significant portion of News Corp’s valuation is tied to its substantial stake in REA Group. The recent 34% decline in REA Group’s share price over the past six months, largely mirroring a broader de-rating in global peers due to uncertainties surrounding Artificial Intelligence (AI), is a notable headwind.
- News Media Division Challenges: The company’s news media division continues to face headwinds, with advertising trends expected to remain “difficult” in the near term.
UBS’s More Bullish Stance:
Over at UBS, the sentiment towards News Corp shares is more optimistic. They have issued a ‘buy’ recommendation with a price target of $65.50.
While acknowledging that concerns about AI-driven job displacement remain a significant overhang for the entire media sector, UBS finds reassurance in News Corp’s strategic initiatives. These include:
- Bloomberg Partnership Extension: News Corp has extended its partnership with Bloomberg to incorporate AI licenses, a move that positions them to leverage AI advancements.
- Enterprise Deals within Dow Jones: The company has successfully secured a range of enterprise deals within its Dow Jones segment.
UBS believes that News Corp is uniquely positioned within the media landscape to capitalize on the gradual monetisation of content and ongoing AI developments. Their rationale includes:
- Proprietary Data Exposure: Access to the valuable proprietary data held by Dow Jones.
- Defensive Moat from REA: The strong market position and “defensive moat” provided by its stake in REA Group.
- Existing LLM Partnerships: Demonstrable success with existing large language model (LLM) partnerships, serving as crucial proof cases for future collaborations.
UBS sees potential for a re-rating of News Corp’s stock as more partnerships emerge in the short to medium term. They anticipate that as LLMs and AI platforms increasingly require reliable data and content for model training, News Corp’s unique assets will become even more valuable.
As of Monday, News Corp shares were trading 1.2% higher at $38.77.
Key Takeaways for Investors:
- Valuation Opportunity: The current share price, trading near 12-month lows, may present an attractive entry point for long-term investors, particularly given the positive outlook from brokers like UBS.
- REA Group’s Influence: Investors must closely monitor the performance of REA Group, as its share price significantly impacts News Corp’s overall valuation.
- AI Uncertainty: While a concern for the sector, News Corp’s proactive approach to AI through partnerships and data assets could mitigate some of this risk and even create new opportunities.
- Diversified Business Model: News Corp’s portfolio, encompassing real estate, news media, and book publishing, offers some diversification, though headwinds in certain segments need to be considered.
