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“Paradise Lost” was the title of Wells Fargo analyst Steven Cahall’s Tuesday report, in which he cut his price target on Walt Disney’s stock by $13 to $203, citing a streaming subscriber “reset.”
The Wall Street expert maintained his “overweight” rating on the Hollywood conglomerate’s shares, though. “We look to the Netflix experience and content amortization expectations to remain confident in Disney, but our price target falls as we reset our sub numbers,” he explained.
Recent management commentary on streamer Disney+ user trends in the current quarter “has cast a spotlight on what it will take for Disney to reach fiscal year 2024 subscriber guidance,” Cahall argued. “We think investors now have some causes for concern, but if the content pipeline ramps up as planned, then we believe guidance remains achievable (though perhaps not conservative).”
The analyst continued: “After making it look all too easy, Disney now has a bit more work ahead on direct-to-consumer.”
Disney CEO Bob Chapek told a recent investor conference that he remained “bullish and confident” about long-term subscriber growth, but expected only an increase in the “low single-digit millions of subscribers” for Disney+ in the current quarter, compared with a Wall Street consensus estimate of 17 million, according to Cahall. “Based on the CEO’s recent comments, we revise [quarterly] Disney+ net adds from 13.5 million to 2 million driven by disney+hotstar going from +8.5 million to -1.5 million and core subs going from +5.5 million to +3.5 million,” the Wall Street observer estimated. “Unpacking his commentary, we think the drivers are primarily a lot of noise in auto-renewals at [India’s] hotstar, a slower Latin America launch of Star and less content than what otherwise would be available due to continued COVID-driven production shutdowns.”
The Wells Fargo analyst cut his fiscal year 2024 Disney+ subscriber estimate from 256 million to 236 million, with company guidance standing at 230 million to 260 million. He estimates total Disney streaming users will reach 335 million then, down from 357 million, with guidance at 300 million to 350 million. “Now at the lower end of the Disney+ long-term guidance, we expect investors to wonder if it’s a risky bar,” Cahall concluded.
He also looked at Netflix as the comparison story. “From 2017 to 2019 Netflix added about 26 million subs per annum, excluding India,” the analyst noted. “Content amortization increased from about $5 billion in 2016 to more than $9 billion by 2019. While the environment was perhaps less crowded for streaming, we think the example shows that it can be done. We think content delivery is the best predictor of subscriber acquisition, so the question for Disney is a simple one: will the content do it?”
Concluded Cahall: “If Disney can ramp up content breadth and depth as it plans to per the December 2020 investor day, then we think fiscal year 2024 guidance is achievable. We see the Disney+ fan event and build of content through calendar year 2022 as the next major set of catalysts. Investors need to see that Disney can bring in new subs, especially outside of the core genres.”
Disney shares were down 1.3 percent shortly before 10 a.m. ET.
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