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Media Giants Take a Cord-cutting Hit

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Time Warner, Inc. (TMX) sent media stocks into a tailspin on Wednesday after its quarterly results highlighted a 2% drop in revenue at the Turner broadcasting division. Hulu added to shareholder pain, announcing an inexpensive cord-cutting package that includes many popular cable channels. The all-day rout marked a delayed reaction to ESPN’s announcement last week that it’s laying off more than 100 workers due to declining viewership.

Viacom, Inc. (VIAB) and CBS Corp. (CBS) were especially hard hit ahead of Thursday earnings, which was unfortunate, given aggressive countermeasures taken by both media giants in the last two years. CBS has sought to retain viewers with its own on-demand subscription package while VIAB finally ended years of drama with the departure of nonagenarian Chairman Sumner Redstone, generating an opportunity to play catch up with better-positioned rivals.

VIAB Weekly Chart (2007–2017)

VIAB

The company beat EPS estimates by 20-cents in a pre-market release while quarterly revenue rose 8.5% year over year to $3.26-billion, ahead of consensus by more than $200-million. The metrics triggered a sell-the-news reaction that added to Wednesday’s 7.5% decline, pointing to shell-shocked shareholders trying to digest the impact of recent events. At a minimum, the carnage tells sidelined market players to keep their powder dry for now.

The stock broke out above 2007 resistance at $45 in 2011, ahead of a strong uptrend that reached an all-time high at $89.76 in 2014. It then rolled over in a major downtrend that continued into the first quarter of 2016, finding support at a 6-year low near $30. The Redstone drama consumed most of 2016, limiting a mid-year bounce to the mid-40s while selloffs ran out of steam in the mid-30s.

An April 2017 test at range resistance got sold aggressively, reinforcing that barrier, ahead of a decline that broke 50-week EMA support this week. This bearish action opens the door to another test at range support, which is likely to hold due to a positive volume pattern that indicates heavy bottom fishing and value hunting in the last five months. That could change when shareholders realize that Sumner’s departure hasn’t resolved structural issues that could yield even smaller viewing audiences in coming years.

CBS Weekly Chart (2007–2017)

CBS

CBS dominates traditional broadcasting but has also lost eyeballs at a steady pace in recent years. The bleeding has been less severe than its rivals due to older demographics that are more resistant to the transition into streaming entertainment. Even so, the company has taken steps to retain viewership through an all-access standalone subscription that carries unique risk because it isn’t part of popular streaming packages now offered on alternative platforms.

The stock topped out in the mid-50s at the turn of the millennium and stalled within 15-points of that resistance level in 2007. It completed a 100% round trip in 2013 and dropped into a choppy corrective pattern that found support in the upper-30s in 2015. A 2016 recovery wave lifted price back to resistance, yielding a February 2017 breakout that failed to attract momentum buying interest.

A March pullback reached breakout support in mid-April, ahead of this week’s selloff which also triggered a failed breakout. This bearish action could signal a long-term double top, ahead of much lower prices in coming years. However, bulls should get a few opportunities to reverse the sinking ship at the 50-week EMA, which is now getting tested for the first time since September 2016.

The Bottom Line

The broad swatch of media companies got sold aggressively this week after Time Warner’s Turner division reported an unexpected contraction in ad revenue. The selloff signals a wake-up call in the cord cutting phenomenon, which may signal the eventual demise of many traditional media outlets.

<Disclosure: the author held no positions in aforementioned stocks at the time of publication.>

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