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“Sentiment on Disney hasn’t been this despondent since before the ’17 streaming pivot,” Wells Fargo analyst Steven Cahall said in a Monday report, entitled “Rage Against the Content Machine,” in which he cut his stock price target on the Hollywood giant by $7.
In a deep dive, he analyzed “the recent Disney+ subscriber slowdown,” after early streaming momentum thanks to such original series as The Mandalorian. “Our work indicates that the slowing content machine was the culprit, and our cohort analysis of organic core net adds (i.e. sub growth within existing markets) supports subs re-accelerating with content amortization increasing,” he concluded. While his new price target of $196 “re-bases our Disney+ multiple for the added risk,” Cahall highlighted: “Disney+ is now at a $150 billion discount to Netflix based on our deconstruction, so we’re aggressive buyers.”
The Wells Fargo expert is the latest to reduce his stock price target on Disney shares. Other analysts who did so following the conglomerate’s latest quarterly results earlier in the month included Atlantic Equities analyst Hamilton Faber, who downgraded his rating on Disney from “overweight” to “neutral” and cut his price target from $219 to $172, CFRA Research’s Tuna Amobi, who dropped his price target by $20, to $200, and Cowen’s Doug Creutz, who cut his target by $10, to $137.
In his Monday report, Cahall asked the question: “Penalty box or time to back up the truck?” explaining: “Investors are questioning Disney+ fiscal-year 2024 subscriber guidance, with or without (India’s) Hotstar, and worry that the content strategy has at best run behind and at worst run off track. With the stock below $155, we think investors have to decide whether Disney+ is structurally less good than we thought or if this is just a short-term blip.”
The Wells Fargo analyst’s take is this: “Excluding new market launches we think fiscal year 2021 organic core net adds (i.e. net adds excluding market launches, excluding Hotstar) were about 14 million. Disney will have to average about 27 million core net adds each year from fiscal year 2022 to fiscal year 2024 to reach its midpoint subscriber guidance (of 245 million, with the range being 230-260 million). So it’s a gut check whether future content will drive new subscribers.”
Cahall noted that his analysis suggests that core organic net adds are “heavily weighted to a few key markets/regions: U.S., Latin America, U.K. and France.” Argued the analyst: “We consider these Disney ‘home markets’ and thus think driving incremental subs is achievable if the content spend rolls through.”
The Wells Fargo expert said that one of the challenges of valuing Disney was “unpacking the parts of its sum.” Using a historical analysis, he suggested that Disney’s streaming business peaked in May 2021 with an enterprise value of around $275 billion, of which about $240 billion was attributed to Disney+. “We now think Disney direct-to-consumer is worth about $165 billion, of which about $135 billion is Disney+,” making for a roughly $150 billion discount to Netflix. “We view a nice middle-ground as the upside.”
As of 10:50 a.m. ET on Monday, Disney shares were down slightly at $153.09.
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