Impact of Avatar Sequels on News Corp Stock

News Corp (NASDAQ:NWS) is a media conglomerate that competes with New York Times (NYSE:NYT), Time Warner (NYSE:TWX), Disney (NYSE:DIS), Viacom (NYSE:VIA) and CBS (NYSE:CBS) in a variety of businesses ranging from broadcasting and cable networks to filmed entertainment and publishing. The company also owns the social networking website MySpace. Our price estimate for News Corp stands at $20.17, which implies a premium of roughly 18% to market price.

News Corp released Avatar towards the end of 2009 and the movie quickly became the highest grossing movie of all time at the box office, earning close to $2.8 billion. ^[1] The movie captured attention due to its unique animation and 3D affects. News Corp is likely to release at least two more sequels to the movie, although the first of these is unlikely to hit theaters before 2014. ^[2]

Can Avatar Sequels be Successful

Sequels have been hit-or-miss in Hollywood, some of them failing and some of them outpacing the original. Often, when a movie becomes a brand, a sequel tends to do a good business. Examples for this include Harry Potter and Spider Man. Given its unique story and visuals, coupled with the tremendous success of the first movie, Avatar could well become a brand to leverage in its upcoming sequels.

With the appeal of 3D effects and animation techniques based on real human movements, News Corp could do well to produce similar movies on a regular basis if it can continue to forge strong stories and innovative concepts. A relevant example in this context is Disney’s pixar subsidiary which typically makes one movie per year, and has seen a relatively steady string of success.

Fox Studios Box Office Market Share –

What Does Avator Add to News Corp’s Equity Value?

We wrote an article last year (see Avatar Has Minimal Impact on News Corp Stock) wherein we examined the profits that Avatar generated for News Corp. Based on our expectations of $2.5 billion of global box office business and 20 million expected DVD sales at that point in time, we arrived at a figure of $500 million in profits for News Corp. However there have been two key developments since then. Avatar did close to $2.8 billion at the box office and its DVD sales reached 20 million by May 2010. ^[3] Thus, we believe that News Corp’s profits from Avatar may have surpassed $600 million.

Thus, if the two sequels are as successful as the original Avatar, their addition to News Corp’s stock value could be about 2% given a roughly $53 billion total value estimate for the company. Thus, the sequels should not be independently critical to investment decisions regarding News Corp. However, these films could set a precedent that would have a much more notable impact on the company’s equity value. News Corp could adopt a strategy of launching films in this category, similar to what Disney has done using pixar, improving its share in both box office sales and the DVD market.

Moreover, News Corp may be willing to assume more risk going forward given the success of Avatar and thus potentially reap higher profits. In the case of Avatar, most of its financing was contributed by investors.

Fox Studios Global DVD Market Share –

Drag the trend lines in the modifiable charts above to how various trends in Fox Studios’ box office and DVD market shares affect News Corp’s stock value.

You can see the complete $20.17 Trefis price estimate for News Corp’s stock here.

1. Box Office Mojo Rankings [↩]
2. A Pair of ‘Avatar’ Sequels is on its Way from James Cameron, Los Angeles Times, Oct 27 2010 [↩]
3. 19.7 Million ‘Avatar’ Blu-ray & DVDs Sold, deadline.com, May 11 2010 [↩]