Best cord-cutting trade is a 92-year-old company

Published Wed, Apr 1 20157:10 AM EDT

Evelyn Cheng @in/evelyn-cheng-53b23624 @chengevelyn

The bulls on Time Warner (TWX) stock are watching HBO Now. HBO's announced on-demand subscription service will soon let Apple users watch the latest episodes of "Game of Thrones" and other shows without a cable connection. And analysts say the media giant's foray into the cord-cutting world pioneered by Netflix and Hulu could boost the stock of parent company Time Warner. Tuna Amobi of S & P Capital IQ estimates that about 90 percent of the upside to Time Warner is driven by television and entertainment, with a quarter to a third coming from HBO. "HBO started breaking out not even a year ago," he said. "Part of our 'buy' recommendation is based on strong subscription growth on HBO." Amobi has a price target of $90 a share for Time Warner , with an enterprise multiple of 12. HBO, which includes the Cinemax channel, had about 44 million subscribers in 2014, an increase of about 3.5 percent from the prior year, according to research firm SNL Kagan. Read More HBO Now will be a 'millennial missile': CEO On digital, however, Time Warner Cable lagged as a whole. Netflix topped video subscription services with 37.7 million subscribers in the fourth quarter of 2014, an annual growth of nearly 19 percent, according to SNL Kagan. "The new market question for HBO is … how do we get as many people into an HBO relationship as possible?" said Forrester analyst James McQuivey. "The company is facing the potential of doubling its subscribers if it's smart enough to adapt its subscription plans to meet the needs of the many people who don't subscribe today but could easily do so, if the content and the price add up." The on-demand video service HBO Now is set to launch at $14.99 a month through Apple ahead of the April 12 premiere of the fifth season of "Game of Thrones." Television and entertainment is Time Warner's primary focus now that the firm spun off its other arms: Time magazine last June, AOL in December 2009, and Time Warner Cable in March 2009. The $70 billion market cap company's primary subsidiaries are Home Box Office (which includes HBO and Cinemax), Turner Broadcasting and Warner Brothers. The revamped Time Warner aligns with its roots in Warner Bros. Studios, incorporated on April 4, 1923. The studio created "Rin Tin Tin" in 1924 and pioneered "talkies" with the release of "The Jazz Singer" starring Al Jolson in 1927. In the following decades Warner Bros. produced classics from Looney Tunes to films such as "The Exorcist," "Chariots of Fire," "The Matrix" and the Harry Potter series. The company launched its first television show in 1955 with the Western adventure "Cheyenne" and became the industry's top supplier of television programming in 2003. The studio merged with Time—which founded HBO in 1972—to form Time Warner in 1990. Today, HBO is "the company that's going to change the world of media," said Janney Capital Markets' Tony Wible. Janney's analysis "suggests there is favorable risk/reward for TWX's forthcoming HBO product, as it can offset cannibalization and stands to generate $529 million of incremental net revenue across the average of our scenarios." Wible has a "buy" rating on Time Warner and a $100 price target. "If you're a traditional media investor, it's the one (stock) I feel most secure with," Wible said. It's "highly likely they're going to do partnerships." HBO's announcement with Apple comes after the media company launched a partnership with Amazon Prime early last year that gives Prime members free access to selected HBO shows. Time Warner could get an additional boost from any subsequent HBO deals. The stock has gained an average of 3.67 percent in the five trading days following an HBO deal in the last year, according to analysis using quantitative tool Kensho. Netflix is the worst performer in the same time period, with an average decline of 7.45 percent. To be sure, some analysts see Time Warner's stock as fully valued and point out that HBO Now is a traditional company's effort to catch up to industry trends. "Time Warner's move is a logical one to try and capture a bigger share of that (millennial) crowd," said Lance Roberts, general partner at STA Wealth Management. "The transition to a broader delivery base should prove profitable to offset the decline in traditional cable subscriptions in the future." Marc Chaikin, CEO of Chaikin Analytics, also said Time Warner shares recently made a disturbing "triple top" and is only expected to increase earnings 12 percent this year. Read More Vice CEO: Ready to go 'prime time' with HBO Still, he is bullish on HBO for its strong executive team and recurring properties such as "Silicon Valley." "Basically HBO has been in the forefront of high quality movies. You really have to respect what they've done," he said. "If you've got content you can control the distribution. That's not something they've been able to do, (and) streaming helps them do that." DISCLOSURES: CNBC's parent NBCUniversal has a minority stake in Kensho. A planned merger of Comcast and Time Warner Cable is pending.

Dean-Charles Chapman as Tommen Baratheon and Lena Headey as Cersei Lannister in "Game of Thrones."

McCall B. Polay | HBO

The bulls on Time Warner (TWX) stock are watching HBO Now.

HBO's announced on-demand subscription service will soon let Apple users watch the latest episodes of "Game of Thrones" and other shows without a cable connection. And analysts say the media giant's foray into the cord-cutting world pioneered by Netflix and Hulu could boost the stock of parent company Time Warner.

Tuna Amobi of S&P Capital IQ estimates that about 90 percent of the upside to Time Warner is driven by television and entertainment, with a quarter to a third coming from HBO.