stu99/iStock Editorial via Getty Images
Lionsgate Studios (NASDAQ: LEON) received a Buy rating from Citigroup two weeks after becoming a publicly traded company due in part to its potential as an exclusive content provider.
In addition to initiating a Purchase, the bank also established a $14 price target for the stock.
“LION has a long and successful track record as a content-only company,” Citi analyst Jason Bazinet said in a note to investors. “We believe the company's recent decision to spin off Starz (which should be completed by the end of CY24) may lead to multiple expansion.”
Lionsgate Studios was spun off from parent company Lions Gate Entertainment (LGF.A), (LGF.B) as an exclusive content company and began trading under LION on May 14.
Earlier this year, management laid the groundwork for the spinoff of Starz Studios. Screaming Eagle also invested $350 million for a 13% equity stake in Studios.
Today, Lionsgate owns 100% of Starz and 87% of Studios. Management plans to completely turn Starz around by 2024. At that time, Studios will once again be an exclusive content provider.
Citi expects studios to do better without Starz, since movies generate more revenue relative to spending than television production.
“Using aggregate figures, the revenue generated by LION's content investments has moderated over the years,” Bazinet said. “However, if we remove Starz, which typically has a 1.0x revenue to content spend ratio, the studio is doing quite well. In fact, since 2013, the studio has generated enough revenue to offset all expenses ( excluding corporate overhead expenses) every year (even during COVID and Hollywood strikes).”
Citi also points to library revenue as a reason to be optimistic about the studies. Library revenue is defined as any content revenue acquired after the first sales cycle. The Studio's library revenue has expanded from $500 million to $900 million over the past five years and features more than 20,000 television and film titles.
However, Citi points out a couple of risks to its bullish stance. Firstly, there are the low trade figures observed so far, less than 100,000 per day. Second, Studios will continue to supply content to Starz, so if the network struggles, it could also cause headwinds for Studios.
