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Wall Street analysts on Friday shared their takeaways from the Walt Disney Co.’s fiscal second-quarter earnings report, with slower-than-expected Disney+ subscriber growth in the spotlight.
The streaming service grew to reach 103.6 million subscribers as of the end of March, but that came in below the Wall Street consensus of roughly 110 million subscribers. As a result, several analysts lowered their forecasts and stock price targets. Disney shares were down more than 4 percent before Friday’s market open.
Guggenheim analyst Michael Morris cut his price target by $15 to $210, but kept his “buy” rating on the stock. “Slower digital subscriber growth overshadows broader business progress,” he wrote.
“Direct-to-consumer services grew to a combined 159 million total paid subscribers (versus 146 million in the previous quarter) with management reiterating 230 million-260 million total subs by fiscal year 2024,” Morris noted, but highlighted: “Notably, 103.6 million global Disney+ subscribers was below our 108.9 million estimate, with average revenue per user (ARPU) also light” given its lower-ARPU Hotstar service in Asia is contributing a lot of user growth. “Pacing concerns will likely be the primary investor takeaway,” Morris concluded.
Bernstein analyst Todd Juenger echoed that in his report, entitled “Nail-biting time,” writing: “Core Disney+ subs fall below pace required to achieve fiscal year ’24 guide.” He stuck to his “market-perform” rating for Disney shares, but lowered his price target by $4 to $163.
Juenger estimated that “core” Disney+, excluding Hotstar, added roughly 3 million subscribers in the latest quarter, compared with 13 million in the final quarter of 2020. “We estimate ex-Hotstar, Disney+ must average 5 million net adds per quarter – for the next 14 quarters – to achieve fiscal year ’24 guidance,” he explained. “Management told investors to expect a deceleration” over the next couple of quarters “due to Hotstar India and [a] delayed Latin America Star+ launch.”
And he expressed this concern: “Management gave multiple full-throated reiterations of the fiscal year ’24 subs guide. The difference between 3 million and 5 million is perhaps immaterial or atypical. … But at this stage of the adoption curve, most investors want to see the pace running comfortably above the 5 million rate, not below (even fractionally) – especially since the net adds pace will likely moderate as the base service gets bigger and incremental subs become harder to acquire and retain.”
The analyst noted that management pointed out that the net adds pace accelerated in March, compared to January and February. “Plus there is whatever ‘pull forward’ distortion one ascribes,” Juenger wrote. “Although this surely should impact Disney+ differently/less than Netflix, given Disney+ only launched 1.5 years ago in the U.S., one year ago in most of Europe, and one quarter ago in Latin America.”
Wells Fargo’s Steven Cahall was more upbeat than many peers. In his report, entitled “Back up the truck” (more on that at the end of the next paragraph), he lowered his stock price target from $219 to $209, but kept his “overweight” rating on Disney.
“With 95 million Disney+ net adds in its first five quarters, momentum was bound to decelerate at some point,” he argued. “We expect the stock to pull back and hang out for a bit. However, we view this as an excellent opportunity to accumulate as this is a long-haul content story, and neither the total addressable market nor strategy is at all impaired. We’re buyers on any weakness and see a two-year path to $250. Back up the truck if the opportunity presents itself.”
MoffettNathanson analyst Michael Nathanson in his report focused on how Wall Street’s near-exclusive focus on streaming subscriber trends was a sign of changing times. “A long time ago in a galaxy far, far away, our simple thesis on Disney was that the company … was an earnings beating machine with Street forecasters continually under-estimating its dynamic parks and content engines,” regularly leading analysts to push their earnings forecasts higher, which in turn drove up the stock,” he explained.
Nowadays, “on earnings day, the market – as it has with Netflix – becomes focused on one single metric: Disney+ subscriber growth,” Nathanson said. “Interestingly, in that long ago time before Disney’s direct-to-consumer pivot, this quarter’s blow-out earnings results would have pushed Disney’s stock higher, as operating profits came in better across the board.”
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