Ever since the record-breaking opening for "The Hunger Games", Wall Street's love affair with Lions Gate Entertainment (LGF) has lost steam. The shares have pulled back from its high ($16.19 per share), but is the selloff shortsighted?
Looking at follow-on demand for LGF's hit movie, investors can see that Hunger Games continues to perform at the box office. Domestic sales have well exceeded $300 million. In addition, the movie is now catching on in international markets. Last weekend's $15 million overseas total came close its $21.5 million domestic draw. Worldwide, total receipts have now topped $500 million.
This exceeds the numbers used to derive a $16.33 price target last month (see Easy Math To Confirm Your Lion's Gate Price Target).
Of course, stocks aren't built on near-term events. To build lasting shareholder value, LGF is looking to wring the full potential from Hunger Games, as well as its other hit franchises (i.e. Twilight, Mad Men, etc).
The odds favor Lions Gate for two key reasons:
- Its key properties possess rabid fan bases. It's safe to assume that monumental blunders will be required to alienate these captive audiences.
- More importantly, Lions Gate has visionary leadership. If you can imagine a way for LGF to make money from one of its franchises, there's a good chance the company is already working on it.
One needn't look far for proof. For example, last year, LGF inked a watershed deal to bring Mad Men to Netflix (NFLX) customers. More recently, it has worked closely with Internet platforms like Groupon (GRPN) and Fandango to optimize movie ticket sales. The company has also been leveraging the Facebook (FB) platform to increase exposure and profits (for example, a Hunger Games adventure game was released on Facebook last month).
Most of all, LGF had positioned itself to seize control of a massive demographic now that Warner Bros' Harry Potter series has concluded. Indeed, Warner Bros. President has been quoted as saying, "We're not going to replace Harry Potter with any single movie - not unless we had a Twilight or a Hunger Games".
Well, Lions Gate has both and much more, due in part to its Summit acquisition. More on this below.
Looking ahead, investors can count on Lions Gate's innovative business acumen to maximize the profitability of virtually any endeavor it undertakes. For the Hunger Games franchise, the possibilities could be limitless. The story is based on a post-apocalyptic world consisting of numerous cultures (12 districts, plus 1 capital), each of which has deep history and a wealth of potential characters to explore. Consider the fact that Katniss Everdeen is a participant in the 74th annual Hunger Games. This opens up the possibility for 73 sequels… and that's just thinking myopically.
Also attractive for long-term investors, LGF management seems to have honed its eye for hot properties. Even as Hunger Games takes off, LGF is queuing up a plethora of movies that could equal its success. These include "Ender's Game", "Chaos Walking", and "The Night Circus". If you haven't heard of these titles, you may not have to wait long (remember, for most of the population, Hunger Game seemingly came out of nowhere).
Ender's Game is a cult classic and targets the same demographic as Hunger Games. This is likely why the movie is slated to be released three weeks before the Hunger Games sequel (Catching Fire). Riding the hype, Ender's Game may catch fire as well.
The Chaos Walking book series (trilogy) has won several awards and is building momentum. This could enable an unknown-to-mass-market-breakout story ala Twilight and Hunger Games. To ensure success, Lions Gate has already signed Doug Davidson's Quadrant Pictures to produce the film. Davidson produced "The Departed" and "How to Train Your Dragon", so moviegoers (and investors) can bet on a quality offering. Thus, Lions Gate has the potential makings of two additional mega-franchises.
The Night Circus could be the biggest winner of them all. By intertwining magic into a love story, LGF hopes to capture the broadest array of viewer imaginable. It is already assembling an all-star team to create the film, including screanwriter Moira Buffini (Jane Eyre) and producer David Heyman and Jeff Clifford, who did none other than...Harry Potter.
Lions Gate clearly understands that content is king. The Internet has enabled the distribution of content virtually anywhere around the globe, at virtually any time. While distribution outlets like Comcast (CMCSA) and Time Warner Cable (TWC) fight to attract premium programming, content providers are commanding ever-increasing sums for top titles.
This, no doubt, was the inspiration behind Disney's (DIS) acquisition of Marvel in 2009, Comcast's numerous content-related investments, and of course Lion Gate's recent buyout of Summit Entertainment.
Armed with several franchises to fuel earnings for the next 5 years, Lions Gate could itself become an acquisition target. Either way, the company appears poised to reward shareholders who can ride out the near-term sell off and get ahead of its upcoming catalysts.
Disclosure: I am long LGF.