Kids content company WOW! Unlimited Media (WOW! Unlimited Media Stock Quote, Chart TSXV:WOW) got a target price reduction from Echelon Wealth Partners on Tuesday on the back of changes to the agreement between WOW! subsidiary Frederator and key channel affiliate ADME.
Echelon Wealth’s Rob Goff says that although a natural evolution in the relationship between ADME and Frederator, the result will impact WOW!’s top line. Under the newly revised agreement, Frederator will be transitioning certain channels back to ADME to be managed internally, although Frederator will continue to manage and distribute other channels which ADME can cancel on 30-days notice.
“We are proud of Frederator’s role in helping to build ADME’s tremendous growth over the past couple of years and we are looking forward to continuing our relationship and incubating new and exciting channels. ADME’s success is yet another example of Frederator’s proven ability to help generate explosive audience growth on YouTube.
Going forward, Frederator intends to deploy this audience-building expertise to grow its higher-margin Owned and Operated channels where the Company retains 100 per cent of YouTube revenues,” said Fred Seibert, CEO of Frederator, in a press release.
Goff notes that as per WOW! management’s updated 2019 guidance, gross revenue is down from $100 million to $85 million and operating EBITDA is down from between $3.0 and $4.0 million to between $2.4 million and $3.4 million, with the revision assuming the loss of all of the channels owned by ADME for the second half of 2019.
Goff has moved his 2019 revenue and EBITDA estimates from $105.6 million and $3.5 million, respectively, to $90.6 million and $2.9 million, respectively.
“We believe the recent aggressive moves by Disney with its announced pricing at US$6.99 and five-year subscriber targets will give WOW! greater pricing leverage with existing clients Netflix and Amazon,” writes Goff.
“Furthermore, we see Disney itself emerging as a potential buyer of programming to strengthen its product offering. We expect more capital to be allocated to kids and family content production, not only by Netflix but also by other key streaming players like Amazon, Apple, and Alphabet’s YouTube,” he says.
Goff is maintaining his “Speculative Buy” rating while lowering his target from $2.00 to $1.60, representing an expected return of 65.0 per cent at the time of publication.