With Disney+ subscriber growth stalling in its latest quarter, as disclosed Wednesday after the stock market close, and earnings missing expectations across the board, Walt Disney’s stock fell more than 8 percent in early Thursday trading and is facing a Netflix moment of sorts, according to Wall Street experts.
That is because during the first half of 2021, a reduced pipeline of original content and slower subscriber gains following a coronavirus pandemic-fueled 2020 saw Netflix’s stock under pressure until investor and analyst sentiment strengthened heading into its third-quarter earnings update, which showed increased momentum.
Disney will be hoping to replicate that after sticking to its longer-term streaming subscriber target range, which is a key focus for investors now. Several Wall Street analysts have recently reduced their Disney+ forecasts. And Atlantic Equities analyst Hamilton Faber downgraded Disney’s stock from “overweight” to “neutral” and cut his price target from $219 to $172 after Wednesday’s earnings update, arguing its user reach in markets that have launched Disney+ was nearing maturity.
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Others maintained their stock ratings Thursday, but highlighted that investors will need more patience and Disney more investment. After all, the entertainment powerhouse highlighted that it wasn’t expecting to hit its full original content and streaming subscriber growth stride until next year when fresh programming and additional market launches provide a boost. That should start making a noticeable impact in the back half of its fiscal year 2022, which started Oct. 3, it signaled, with the third calendar-year quarter set to be the first in which the service will release originals from all its major brands.
No wonder then that Cowen analyst Doug Creutz summarized the Hollywood giant’s streaming outlook this way on Thursday: “Disney+ subscriber growth [is] likely to remain subdued until the second half of fiscal 2022.”
MoffettNathanson analyst Michael Nathanson echoed that and made the Netflix comparison, writing in a Thursday report: “The admission that Disney+ growth will re-accelerate when content spending re-accelerates is consistent with the recent experience at Netflix, where the growth slumber created by the pandemic’s pull-forward of subscribers was finally shattered by record amounts of new content dropped in the last few months of this year.”
Guggenheim analyst Michael Morris similarly shared that he and his team “believe momentum can build as confidence in the content slate grows, similar to the dynamic we saw with Netflix in the third quarter.” And he added: “Fueled by a robust though delayed content pipeline, management anticipates net adds in the second half of 2022 to be meaningfully higher than in the first half with a majority of titles debuting in July–September.” Morris highlighted that as a result, Disney now expects its fiscal year 2022 to be the peak year of losses for Disney+ rather than fiscal 2021 due to production delays.
In its slowest-growth quarter since its launch two years ago, Disney+ added only 2.1 million subscribers in the latest period ended on Oct. 2 to hit 118.1 million, but the entertainment conglomerate reiterated its guidance for reaching 230-260 million Disney+ subscribers by the end of fiscal year 2024. Importantly, Morris also noted that this will require more program spending. “Disney plans to increase its prior content expense guide (previously $8-9 billion in fiscal 2024) as it invests in more local and regional programming (340-plus local original titles currently in production),” he said.
Creutz, though, expressed some doubts about the Disney+ content strategy, which some have argued should include a bigger focus on more adult-oriented content to expand offerings beyond Disney’s traditional fan base. “Management expects Disney+ adds in fiscal 2022 to be back half-loaded based on a fiscal fourth-quarter content ‘surge’ (that will be typical of the content pipeline in fiscal 2023 and beyond) and the timing of some new regional launches,” he wrote. “We remain somewhat skeptical that more Star Wars/Marvel/animated/family content will be sufficient to grow the Disney+ audience out to parity with Netflix.”
Bernstein analyst Todd Juenger was even more blunt. “The pace of Disney+ net adds remains well below the run-rate required to achieve the mid-point of fiscal year 2024 guidance,” he wrote in his report. “The re-acceleration, other than additional market openings, will supposedly come when the full cadence of new original content starts hitting the service in the fourth quarter of fiscal 2022. But we believe the underlying premise (i.e. more content = more subs) remains in doubt.”
He expanded on that thought, arguing: “Who is this consumer who wasn’t interested in Disney+ when it had the library and some original Marvel, Star Wars content, but will become interested when there is twice the amount of the same brands of original content? We have yet to meet the child who says no to one scoop of ice cream, but yes to two.”
Concluded Juenger: “Our main takeaway from Disney [earnings] is that the resumed slope of the Disney+ subscriber curve, and the recovery of revenue/margin at parks, is coming later than the market had expected, provided it comes at all. Investors now must wait until the second half of fiscal 2022 to see acceleration in both — and in the fiscal third quarter, it’s from new additions (new Disney+ markets, cruise ship launch) as opposed to same-store organic” growth.
Disney shares opened lower Thursday and were down 8.4 percent at $159.80 as of 10 a.m. ET.
Several Wall Street experts cut their earnings estimates and stock price targets after Disney’s latest earnings report.
Creutz, who has a “market perform on Disney shares, cut his stock price target by $10 to $137, saying “costs seem to be accelerating across the business.” Not only will streaming content spend rise, but linear TV networks “face a $500 million earnings before interest and taxes headwind in the first quarter of fiscal 2022 largely due to rising sports programming costs,” he noted. “Inflationary (management’s term) labor cost and cost of good sold pressure is likely to at least partially offset the revenue recovery at [theme] parks,” and management is also projecting higher capital expenses in the just-started fiscal year. Concluded Creutz: “While some of these rising costs are investments in future growth, we think investors have already been pricing in the future growth without accounting for the rising cost base.”
Given the higher expenses in various units, Nathanson, who has a “neutral” rating on the stock, also cut his earnings forecasts and his stock price target by $5 to $175. And Juenger cut his by $3 to $164.
BMO Capital Markets analyst Daniel Salmon also has a “market perform” rating on Disney and on Thursday lowered his stock price target for the company by $15 to $180. He left his streaming business valuation unchanged, though, at $125 a share, a discount to Netflix’s “proven free cash flow generation,” but cut his “core value” to $55 per share, “driven by reduced estimates,” including for theme parks and TV networks.
CFRA Research analyst Tuna Amobi maintained more bullish “buy” rating on Disney, but dropped his stock price target by $20 to $200.
