Recently, Tucker Carlson announced that he would be moving his content to Twitter (TWTR), following his termination from News Corporation (NASDAQ:NWSA), the owner of Fox News. Carlson was reportedly fired from Fox following allegations that he had mistreated staffer Abby Grossberg, leading her to sue the company for discrimination. He remained under contract with Fox News at the time he was fired.

‘Tucker Carlson Tonight’ had long been one of Fox News’ most popular and most controversial programs. It got extremely good ratings (approximately 3 million viewers a night), but was widely criticized for amplifying extremist content. Because of the controversial nature of Tucker’s show, it was under a near-complete corporate advertiser boycott, generating only 7% of Fox’s ad revenue despite driving a far higher percentage of its viewership. In 2020, before the corporate boycotts got underway, Tucker was driving 16% of Fox’s ad revenue.

If you ever watched Tucker’s show when it was on the air, you probably noticed that its ad mix was mostly MyPillow, health supplements, and a few insurance pitches. Post-2020, the show did not have any of the big corporate ad spots that the more mainstream Fox hosts got. After Tucker left, advertisers reportedly returned to Fox’s 8PM slot (the slot that previously showed Tucker’s show).

It’s clear that Tucker Carlson Tonight was at a disadvantage with advertisers. However, Tucker Carlson’s show provided Fox with indirect benefits. The show undeniably brought viewers to Fox News: this is proven by the fact that Fox’s ratings plummeted after it was cancelled. It’s plausible to think that Tucker not only brought viewers to his own show, but also to more mainstream Fox shows that were able to bring in corporate advertising dollars. If so, Fox lost more than just Tucker’s own advertising dollars when it fired Tucker, but also the spillover audience Tucker brought to nearby slots.

Fox fired Tucker in itself was a risky, but not entirely irrational, business decision. Tucker ultimately did put the Network on thin ice with advertisers, compromising its revenue-generating abilities. However, the fact that Tucker is actively bringing his show elsewhere is very bad news for Fox. It means that many of the same people who once sat down to watch Fox News will now be glued to Twitter on their computers, smartphones and tablets, actively taking audience members away from Fox. For this reason, I consider Tucker’s new Twitter show a negative catalyst for Fox—even though I’m only neutral on the stock overall, as it seriously has an attractive valuation.

Details on Tucker’s Twitter Show

To show that Tucker Carlson’s Twitter show is a threat to Fox News, I first need to establish what exactly Carlson will be doing. Carlson himself only made one Twitter post about the new show so far, and it was fairly cryptic. In fact, he didn’t even mention doing a regular show, he just vaguely hinted that “big things” were coming.

What we do know is how Carlson will monetize his show. He will host the program in the form of Twitter videos and will bring in revenue via the subscription feature. Basically you will have to pay to subscribe to Carlson in order to see the show. Carlson may also get a cut of the revenue his show generates, a feature that Elon Musk says will be rolling out shortly.

Many commenters are unconvinced that Carlson can make the Twitter format work. MSNBC noted that the subscription feature that Tucker hopes to use to generate revenue is not particularly popular. In fact, the feature failed under previous management, before being revived by Elon Musk. Musk is trying very hard to drive interest in the subscription feature, offering his own paid content and visibly promoting other creators.

Possible Impacts on Fox News

Whether Tucker Carlson’s Twitter show succeeds or not, it clearly has the potential to make life difficult for Fox News. Elon Musk already has a lot of support from Republicans, and that popularity is driving Republicans to Twitter. Already, we’ve seen an increase in engagement from Republican-leaning Twitter accounts, and Tucker’s show is likely to accelerate that trend. As previously mentioned, Tucker Carlson Tonight was the most viewed show on Fox News, bringing in three million viewers per night on average. The potential for such a show to attract viewership to new platforms cannot be discounted.

Valuation

So far, I’ve made the case that Tucker Carlson’s migration to Twitter is bearish for Fox News, and News Corp as a whole. I maintain that is the case. Tucker has the potential to take a lot of viewers with him, and for media companies, viewers equal revenue. Nevertheless, I am neutral on NWSA stock, one of the main reasons being that its current valuation is pretty cheap. According to Seeking Alpha Quant, NWSA trades at:

• 21 times earnings.

• 0.96 times sales.

• 1.2 times book value.

• 8.8 times operating cash flow.

• 8.1 times free cash flow.

As you can see, NWSA is pretty cheap going by multiples. Yet it has positive growth in EBIT and revenue. Potentially, the money invested in the company today could prove worth it in the future. FOX has $1.45 in free cash flow (“FCF”) per share in 2022. If you assume 0% growth and discount that at 10%, you get a $14.5 price target, which is pretty close to today’s price. The 10 year treasury yield is currently 3.46%, so this discounted cash flow model incorporates a fairly large risk premium. Basically, News Corporation’s free cash flow would have to decline indefinitely for it is not worth the investment today. In any scenario where FCF growth is positive, or even stagnant, the stock is worth buying.

Competitive Position

One reason to think that News Corporation can maintain an adequate level of profitability is the fact that it has a strong competitive position. Unlike most other cable news networks, it leans conservative, and enjoys relatively little competition among conservative news networks. Generally, it’s thought that MSNBC leans to the left and CNN leans centrist. This leaves Fox News and Newsmax to divide the conservative audience amongst themselves-a fortuitous situation for News Corp, the world’s pre-eminent provider of conservative-leaning news content.

Risks and Challenges

I’ve rated News Corp ‘hold’ because I think that Tucker Carlson’s Twitter venture threatens its ad revenue but the stock is cheap enough that this might already be ‘priced in.’ I’m pretty much neutral on the stock overall. Nevertheless, there are several risks for both longs and shorts to keep in mind, including:

• Risk to longs: secular decline in TV viewership. TV viewership is broadly on the decline. In 2021, 112 networks out of 124 have less viewers than they had in 2016. So far, Fox has been spared the loss of viewers by the fact that it has an older than average audience that is slow to adopt new technologies. But as time goes on, broad trends in the cable news industry may affect Fox as they have affected its competitors.

• Risk to longs: Tucker’s Twitter show. This has already been discussed at length, but to briefly summarize: Tucker Carlson’s Twitter show could take viewers away from Fox news. Tucker is very popular with Fox News’ core demographic, namely, older conservative-leaning people. The more viewers he brings over to Twitter, the less time these viewers are going to spend watching FOX News. Ad rates are a function of ratings and a few other factors. So Tucker’s show could be thought of as a risk to FOX News.

• Risk to shorts: Fox News’ brand strength. Fox News is currently ranked the #1 news brand in the United States, and it’s not hard to see why that’s the case. The company consistently dominates TV news ratings and enjoys high audience loyalty. While the broad trend in cable news is one of decline, Fox’s brand strength could be enough to overpower industry-wide trends. If so, the company’s stock may defy bears for a surprisingly long time.

The risks outlined above are serious enough that I personally wouldn’t take a position in News Corporation stock, either short or long. The company is in a declining industry, yet is very strong individually. It’s an ambiguous situation, the type of which is best avoided altogether. Tucker Carlson’s Twitter show may or may not succeed. It’s impossible to know how it will turn out. What’s certain is that it presents a threat to Fox News’ views. That alone is reason enough to avoid News Corp stock.