Businesses were required to close offices and shut down brick and mortar outlets and find ways to conduct business virtually. The pandemic forced people to work from home and businesses to accelerate their digital transformation. Ecommerce provided a much needed source of revenues to offset the loss of in-store sales, and, after a 2Q pause in online advertising, businesses increased their use of digital media to promote and drive traffic to their own ecommerce operations.

If 2020 surprised us in two ways, it was 1) the rapidity with which advertising declined in 2Q, and 2) how quickly it recovered in 3Q (and into 4Q). While traditional advertising mediums such as TV (-35%), radio (-48%), outdoor (-37%) and newspaper (-44%) advertising really struggled in 2Q 2020 (just after the pandemic started), online advertising (-3%) held up remarkably well. Within online advertising, it was a bifurcated market: Advertising revenues at Google (-8%) and Facebook’s (+11%) decreased by 2% on a combined basis while revenues from all other publicly traded online advertising companies decreased by a combined 16%. Advertising results in 3Q were encouraging, particularly as those trends continued into 4Q. At traditional media companies, revenues moderated substantially, while at online advertising companies, revenues returned to mid-teens growth (+13%). Again, the online advertising marketplace was bifurcated, with online advertising at Google (+10%) and Facebook (+22%) growing a combined +14%, while online advertising from all others increased by 7%. If there is a silver lining to the advertising struggles of 2020, it is that we foresee the “mother of all easy comparisons” in 2Q 2021 combined with the benefits of vaccine distribution which should enable the beginnings of an economic recovery.

OUTLOOK – INTERNET AND DIGITAL MEDIA

INTERNET AND DIGITAL MEDIA COMMENTARY

Two Trends to Watch in 2021: Connected TV Advertising and Retail Media
The pandemic accelerated a number of technology trends, from the use of online groceries to the consumption of multiplatform gaming services to increased viewing on streaming services. Viewing habits have been evolving for years, but online video platforms greatly benefited from work at home requirements. Over the last 4 years, nearly 19 million fewer homes now receive pay television services, according to Leichtmann Research Group, which tracks quarterly changes to subscriber counts. The biggest declines have come from satellite TV providers (11.9 million fewer homes). These declines have been offset somewhat by virtual MVPDs (multi- channel video providers) such as Hulu, Sling TV, and FuboTV.

Connected TV (CTV): Forced to stay at home, consumers have migrated to subscription video on demand (SVOD) platforms such as Netflix and Disney+. Fortunately for advertisers, advertising on demand (AVOD) services have also benefited from a migration of consumers to their platforms. AVOD combines the premium viewing environment of television with data-driven targeting of online advertising. AVOD service providers include TubiTV, PlutoTV, Vudu, Crackle, Peacock, as well as connected TV device makers such as Roku and Samsung. AVOD doesn’t begin to replace linear TV viewing and advertising, but it acts as a strong complement by providing incremental reach as linear TV’s reach continues to erode.
Connected TV (or CTV) advertising is relatively small, but its future is bright. During its third quarter conference call, The Trade Desk (TTD) noted that “our CTV spend grew more than 100% year-over-year in the third quarter as advertisers follow consumers to streaming platforms. eMarketer forecasts that connected TV advertising grew by 27% to $8.1 billion in 2020 and will grow by another 40% to $11.4 billion in 2021.

Retail Media: The pandemic related surge in ecommerce sales has also led to accelerated growth in retail media (also known as ecommerce channel advertising). Retail media is display or search ads that appear on retailer platforms and direct users to products available for purchase there. Amazon is the best situated company in this sector and is the main supplier of retailer media outside of China (where retailer media is already well established).

Following in the footsteps of Amazon’s fast growing advertising business are retailers like Walmart, Target, eBay and Kroger, all of whom are looking outside their core business for growth and have found it in digital advertising. Each of these companies has the requisite scale to compete for advertising dollars, as well as first-party customer data. Most are now building the technology in- house to further expand profit margins in this sector. Sponsored product advertising is the most prevalent form of retail media advertising, and it is estimated that Amazon has a 75% share of this market.

eMarketer projects that marketers will spend $17.4 billion on advertising on ecommerce sites in 2020, a 38% increase over 2019. While this type of advertising benefited from the pandemic, it is also being driven by the “cookie-less” online advertising future in which it becomes harder to track users. Ecommerce sites have the advantage of first party shopping and intent data plus attribution capabilities for measurement and optimization. Expect to hear more from this sector in the future.

Another Year of Strong Stock Price Returns in the Internet and Digital Media Sectors
Earlier we noted the upcoming easy comparisons in 2Q 2021 which could help explain why advertising related stocks continued to bounce back in the fourth quarter. All three segments of Noble’s Internet and Digital Media sectors, where advertising is the primary revenue stream, performed well in 4Q 2020. Noble’s Ad Tech (+63%) and Digital Media (+18%) significantly outperformed the S&P 500 (+12%), while Social Media (+9%) performed slightly below. Only the non-advertising related stocks, those in the MarTech space, underperformed (+0%).

For the year, all four sectors significantly outperformed the broader market. The S&P finished the year up 16%, while Noble’s Ad Tech (+178%), MarTech (+65%), Social Media (+41%) and Digital Media (+38%) all performed extraordinarily well. Within the ad tech space, several stocks doubled or even tripled in price, such as Magnite (MGNI, +276%), The Trade Desk (TTD, +208%), iClick Interacitve (ICLK, +165%), Cardlytics (CDLX, +127%), Fluent (FLNT, +112%) and Perion Networks (PERI, +105%). The MarTech sector also had a couple stocks more than double: Hubspot (HUBS, +150%) and Brightcove (+112%). Within the social media sector, Snapchat’s shares more than tripled (SNAP, +207%), while digital media standouts include FuboTV (FUBO, +214%) and Spotify (SPOT, +110%).

2020 M&A Finishes Strong; TMT Deals Up Significantly
According to MergerMarket, global deal value of $2.2 trillion in the second half of 2020 was the highest on record, and the $1.2 trillion in deal value in the fourth quarter was the highest quarterly value since the second quarter of 2007. This strong finish to the year was not enough to offset M&A declines in the first half of the year. For the year, global M&A deal value declined by 6.6%. Deal values in the technology, media and telecom (TMT) sectors increased by 57% to $852 billion from $543 billion in 2019, though the number of transactions decreased slightly.

2020 was an active year for mergers and acquisitions in North America for the internet and digital media sectors. Noble breaks down our universe into 9 categories and we tracked 515 deals in 2020, a 35% increase over the 362 deals in 2019. The dollar value of the deals we tracked in 2020 increased by 8% to $110 billion, up from $102 billion in 2019.

Deal activity was very robust in the fourth quarter of 2020 as well. We tracked 185 deals, up 33% over 2019 deal activity of 139 deals. The most active sector in 4Q 2020 was the Digital Content sector with 70 deals, followed by Marketing Technology (43 deals) and the Agency & Analytics sector (27). These three sub-sectors have consistently been the most active sectors for M&A throughout 2020.

4Q 2020 deal values increased by 300% to $74 billion, but much of this reflects the $44 billion acquisition of IHS Market by S&P Global. Excluding that transaction, deal values still increased by 61%. As shown in the chart below, Information Services was the sector with the largest deal values, with $47.8 billion in M&A. Two of the three largest deals during the quarter were information services deals: S&P Global deal to acquire IHS Market, and Advent International’s acquisition of Nielsen Global Connect for $2.7 billion. This marked the second quarter in a row in which deal values were highest in the Information Services sector. The Digital Content sector had the second highest number of deals by value in 4Q 2020, with $16.8 billion, followed by Marketing Technology with $4.8 billion in deal value.

Digital Content M&A Remained Strong, Led by Game Developer and Podcast Deals
In Noble’s previous quarterly Media Newsletter we highlighted the Gaming sector as enjoying a robust M&A environment. Those trends continued in the fourth quarter, with nearly two dozen gaming related transactions during the quarter, almost twice that of last year. Roughly 80% of all digital content transactions took place in the Games or Game Studio/Game Developer subsector. The largest deal was Electronic Art’s $1.2 billion announcement to acquire Codemasters, outbidding Take-Two Interactive’s $903 million offer in the process.

While the Podcasting sector is far smaller than the Gaming/Entertainment industry, the fast growing sector continues to attract large buyers. In 4Q 2020, we tracked 9 deals in the podcast sector, led by Amazon’s reported $300 million acquisition of podcast network Wondery, Spotify’s $235 million acquisition of podcast ad platform Magaphone, and iHeart Media’s reported $50 million acquisition of Voxnest, a provider of podcast analytics, publisher tools and programmatic ad serving. For the year, we tracked $1.15 billion in podcast transactions, up from $340 million of transactions in 2019. Some of the most notable podcast deals of 2020 (for which we have reported purchase prices) are listed in the download.

OUTLOOK - TRADITIONAL MEDIA

Are We There Yet?
Most investors are happy to see 2020 in the rearview mirror. The pandemic hit the industry hard, both in terms of fundamentals and stock prices. In terms of fundamentals, the media industry performed slightly better in the second half than the dire predictions made in the midst of the pandemic. Revenues rebounded from the disastrous second quarter, fueled by record breaking political advertising. Many companies raised revenue and cash flow guidance in the third and fourth quarters due to heavy political advertising spend. But, factoring out the huge influx of political, advertising trends seemed to have improved, nonetheless. We caution investors not to get over their skis on optimism. Political advertising, especially the level at which it came in, created a substantial amount of noise around core advertising. We caution that the advertising recovery may not be as robust heading into 2021 without the strong political advertising tailwind. The general economy is still reeling from store and restaurant closures and other restrictions. While a vaccine offers hope that there will be a return to “normalcy”, we remain cautious about the issues that will need to be addressed post pandemic.

For instance, there appears to be a large number of potential bank foreclosures and forced evictions. This could disrupt consumer behavior in the coming months. Furthermore, while everyone is hopeful for a return to 2019 revenue levels, we believe that a large number of businesses are unlikely to return as quickly, and many may be permanently closed. Finally, there is a looming issue of what the government will do to help pay for the increased Covid related expenses, which may be in the form of tax hikes. There is a 96% correlation to advertising and discretionary spending. As such, tax hikes could potentially cut into consumer appetite to spend and, subsequently, advertising. While we anticipate continued improving revenue trends, we are not as sanguine about the advertising recovery in 2021, which we discuss later in this report. As such, in terms of the advertising recovery, investors may be asking throughout the year, “Are we there yet?”

On the stock front, investors that were fortunate enough to buy media stocks during the midst of the pandemic, saw very strong returns. In the fourth quarter, particularly, media stocks increased on average 40%. Even with the strong performance in the second half of the year, media stocks did not overcome the shortfall from earlier in the year. For the most part, media stocks are down modestly in the single digit percentages for the year, except for the Radio industry. There, despite the 33.5% increase in stock prices for the fourth quarter, radio stocks remain down a whopping 37%. As we look forward toward 2021, radio stocks appear to offer the best value and the most upside appreciation potential, assuming a continued advertising recovery. But this industry is not without risks. Many of the radio companies have heavy debt burdens, which may be tricky if the advertising recovery does not continue.

Television Broadcasting

Will M&A Buoy the Group In 2021?
The fundamentals of the television industry substantially improved in the fourth quarter, fueled by an extraordinary and unprecedented influx of political advertising. Many companies raised Q4 guidance to reflect the strong political advertising. To put the numbers into perspective, for most broadcasters, political advertising accounted for nearly 30% of total Q4 broadcast revenues. Comparatively, in 2016, political advertising accounted for roughly 11% of total Q4 broadcast revenue. What makes the numbers so extraordinary is that retransmission revenues in Q4 2016 were roughly 25% of total broadcast revenues and in Q4 2020 represented about 32%. In total, political and retransmission revenue accounted for roughly 62% of total television broadcast revenue. Cash flow margins, as measured by adjusted EBITDA, is expected to average in the high 30s percent range. The robust margins are expected to reflect the high margin political advertising and the significant cost reduction efforts by companies striving to maintain cash flow during the pandemic.

Some investors and analysts appear to be sanguine about the outlook for the TV fundamentals heading into 2021. We are not as optimistic. Some analysts point to the relatively healthy advertising environment, excluding political. Given the large influx of political, we believe that there is a lot of noise in those core advertising numbers. We believe that key advertising categories, such as auto, appear to be recovering nicely, with some broadcasters indicating that it was down a modest 3% to 8% in the fourth quarter. To put this into perspective, auto was down as much as 75% in the second quarter. But, some large local advertising categories, such as restaurants, travel, and retail will take longer to return to 2019 levels, in our view. In addition, as we look forward toward first quarter 2021, there will be some tough year-over-year comps from the large influx of political advertising from the Democratic primaries. Recall the unprecedented amount that Michael Bloomberg spent on the primaries? In January 2020, it was reported that he spent $300 million, and then $500 million in February.

Q1 and Full Year 2021 Outlook
Consensus revenue estimates for the first quarter anticipate TV industry revenues to decline on average 3.6%, which we believe is optimistic. In our view, the estimates do not appear to fully reflect the absence of political advertising, nor the lingering local economic impact from the pandemic. Our revenue estimate anticipates that the average TV company will report revenue declines in the range of 9.2%. The second quarter should reflect much stronger revenue trends given the easy comparable a year earlier, the midst of the economic shutdowns from the Covid pandemic. While we anticipate strong second quarter revenue, we do not believe that the recovering core advertising trends will be enough to offset the absence of political advertising. As such, we anticipate that full year television advertising revenue on average will decline 7.3%. Noble’s estimate is below that of consensus estimates, which anticipate a modest full year 2021 revenue decline of 1%.

The Deal Market Opens
While television fundamentals appear to be still affected by the economic fallout from the Covid pandemic, the deal activity in the industry has picked up. This follows the surprising offer from E.W. Scripps to buy Ion Media on September 24. Ion Media was on the market prior to the development of the Covid pandemic early in 2020 but was pulled when economies were closed and Covid mitigation efforts unfolded. Scripps made a gutsy move to buy Ion in the midst of the pandemic and despite the lack of visibility on the economic and advertising recovery. More recently, the M&A environment seems to remain healthy given that Quincy Broadcasting and Meredith announced plans to sell TV stations.

Where do TV stocks go from here?
Television stocks outperformed the general market in the fourth quarter with the Noble TV index up 39%, significantly outpacing that of the general market, as measured by the S&P 500 Index, up 12%. Unfortunately, the strong year- end performance did not offset the weak performance earlier in the year. For the year, TV stocks were down 9% versus a 16% gain for the general market. The only stock that outperformed the group in terms of both fourth quarter and full year performance was Entravision (EVC). EVC’s shares were up a significant 82.9% in the fourth quarter and 6.1% for the full year.

Despite challenges with the anticipated pace of the advertising recovery and the tough year earlier comparisons, Noble’s media analyst remains constructive on the television stocks, as TV stocks will be buoyed by the M&A market. But 2021 is expected to be bumpy. As the year 2021 closes, investors will once again focus on 2022 and the prospect of another banner political year. TV stocks typically do better the year prior to an election year, up an average 22%. Although, this was not the case in the last two elections. While many TV companies will focus on debt reduction given recent acquisitions, we expect that those with flexible balance sheets will turn toward M&A to enhance longer term growth potential. As Figure #2 illustrates, there are several companies with relatively low leverage, including Gray Television and Entravision that appear poised for growth through acquisitions.

RADIO BROADCASTING

Substantial Sequential Improvement in Ad Trends
Based on consensus estimates, fourth quarter revenues are expected to show substantial sequential quarterly improvement from the third quarter, with 4Q 2020 down roughly 12% versus an average 22% decline in 3Q 2020. The improvement is expected to reflect a sizable boost from political advertising, although television gets the lion share of political dollars. Broadcasters that have digital, podcasting, and diversified operations, likely will perform better than the industry averages. Digital, which for many radio broadcasters includes podcasting, appears to be growing revenues in the double digits. Overall, the industry revenue decline for 2020 is likely to be among the weakest in the media space, though stock prices likely reflect this reality already.

Looking forward toward 2021, radio may have one of the best revenue recoveries in the media space, largely due to the fact that the industry does not have as difficult of political comps as others. Even though political was at record levels for radio in 2020, it still accounted for only 4% of total 2020 industry revenues. While this is up from roughly 3% in the past, it is not too large to overcome given the prospects of a rebound in advertising. To put this into perspective, political advertising for television accounted for as much as 30% of total revenues. Nevertheless, consensus revenue estimates for 2021 may be a little high. The average consensus revenue growth is expected to be 13.5%, a revenue growth estimate that does not anticipate that the industry revenue in 2021 achieves that of 2019. Noble research’s 2021 radio revenue estimate is 7.3%. Either way, radio revenue trends appear favorable. However, revenue will be lumpy. The strongest revenue growth quarter will be the second quarter, which will be up against the easy comps from the year earlier depth of the pandemic. Q2 2020 revenues were down in the range of 55% to 65%.

The improving revenue and, subsequently, cash flow trends will be a welcome relief to many radio companies with stretched balance sheets. 2021 cash flow is expected to have strong double-digit growth, in excess of 20%. As Figure #3 illustrates, the average debt to trailing cash flow for the industry is an historically high 11.1 times. Many companies managed through the pandemic either with government loans or concessions on debt covenants. Yet, there were some radio companies that were able to manage without tripping covenants. We believe that most companies will be able to quickly pare down debt, and debt to cash flow levels will drop to an average of 6 times by the end of 2022. The industry has managed with the relatively high 6 times handle before.

Will Radio stocks recover?
Radio stocks had a strong rebound in the fourth quarter, up 34%, as measured by the Noble Radio Index. But this strong performance was below that of many media sectors including TV, up 39%, and Publishing, up 42%. Nonetheless, some of the strongest performers in the industry in the fourth quarter were the larger radio groups including Cumulus Media, up 63%; iHeart Media, up 58%; and, Entercom, up 52%. Townsquare Media increased a strong 43%. These companies outperformed the Radio Index and many companies across the media spectrum. The remaining publicly traded stocks traded below the Noble Radio Index. The average radio stock is trading at roughly 9 times enterprise value to depressed 2021 cash flow estimates. While the multiple may appear high based on most recent trading multiples over the past five years (excluding 2020), the valuations appear to be compelling considering the strong, double digit cash flow growth that is expected in an advertising recovery.

Publishing

Will there be fewer public Publishers?
The fundamentals of the Publishing industry vary by company and depends on which side of the digital divide the company is on. Some companies, like The New York Times (NYT), have transitioned well toward a digital driven model. Nonetheless, the publishing industry's transition toward digital accelerated during the pandemic. Unique visitors and digital subscriptions accelerated as travel restricted consumers sought news and information on Covid and the Presidential elections. Despite the double-digit revenue growth for digital advertising and subscriptions for some publishers, total revenues are expected to decline in the range of 20%. National publishers, however, may see modest single digit declines in revenues.

Importantly, many in the industry are reengineering cost structures. While the pandemic caught many media companies flatfooted without cost mitigation strategies to maintain cash flow, many publishing companies simply accelerated cost reduction plans already in place. The pandemic allowed many companies to reduce the office footprint or renegotiate office leases at much lower rates. As a result, many publishers have actually exceeded cash flow expectations. Tribune Publishing is a good example of this. The company recently raised fourth quarter and full year 2021 cash flow guidance. As we look toward 2021, we anticipate that revenue declines will significantly moderate, especially since many publishers are near 50% digital revenues. Cash flow for the industry should improve as cost mitigation efforts flow through to a full year of operations.

Investors are focused on the recent offer by the Alden Group for the remaining 68% of the shares of Tribune Publishing that it does not own. The $14.25 per share offer follows the company's closing on the sale of BestReviews, which bolstered the company's already strong cash position. Tribune is expected to end 2020 with as much as $220 million in cash and virtually no debt. We wonder how serious the Alden Group is about acquiring Tribune. Noble research believes that it is likely that independent board members will reject the low-ball offer. The question will be whether the Alden Group will increase its offer to levels that reflect the intrinsic value of the company.

Publishing stocks increased a strong 42% in the fourth quarter, boosted by a 145% increase in the stock price of Gannett. GCI shares began the upward trend following the company's 10Q filing on November 2, as investors concerns over the company's high debt leverage were assuaged. In addition, the company significantly reduced headcount through a large employee buyout in November.

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