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The Walt Disney Co.’s latest quarterly streaming subscriber growth may have provided an upside surprise, but Wall Street’s debate rages over a big question. Can the Hollywood giant hit its own forecast of 230 million to 260 million subscribers by 2024, with Disney+ at break even at that point?
The company’s latest set of results included a much-anticipated update on Disney+ following Netflix’s recently recorded subscriber decline, which led some observers to sound the alarm bells on the streaming pioneer, but also worry about trends in the broader sector, dragging down various stocks.
In early Thursday trading, Disney’s stock fell 4.7 percent to $100.24 after several Wall Street observers reduced their price targets amid broader concerns about and pressure on media and entertainment sector stocks. Meanwhile, a team of analysts at Guggenheim Securities offered a “Neutral” rating on Disney stock given a “tempered” near-term outlook, lowering the conglomerate’s 12-month price target to $110 from $150.
Bank of America’s Jessica Reif Ehrlich noted in a report entitled “A Multiverse of Moving Parts”: “Disney’s fiscal second-quarter results were largely positive although management commentary on second-half Disney+ net adds are likely to be a key concern among investors. While Disney+ net adds of 7.9 million beat our 5 million forecast, management indicated second-half net adds will not be significantly higher than in the first half.”
While reiterating her “buy” rating, she lowered her price target from $191 to $140, which she noted is 23 times her 2023 earnings per share estimate. “Given current market conditions as well as concerns regarding streaming valuations and business models, we no longer use a sum-of-the-parts valuation approach,” Reif Ehrlich explained.
BMO Capital Markets analyst Daniel Salmon in his post-earnings Disney report compared management’s commentary and the development stage that Disney’s streaming operations are in to Netflix’s situation. “There was a little more emphasis on profitability in direct-to-consumer, but Disney+ is still launching new countries and is less mature than Netflix, thus we still see a growth mode largely intact,” he wrote in a report. “Disney is the type of blue-chip stock investors will want to buy once the market stabilizes, but we remain ‘market perform’ as we seek a clearer vision on how Disney/ESPN and live sports will shift to streaming.”
The BMO Capital Markets expert cut his target price by $5 to $135, maintaining his valuation of the conglomerate’s streaming business at $80, with “the core declining to $55 from $60,” reflecting “slightly higher estimates more than offset by lower multiples, driven by reduced peer multiples.” How does this compare to Netflix? “Our direct-to-consumer value is based on a 10-year discounted cash flow, which implies 5.3 times fiscal year 2023 revenue and compares to 5.5 times implied by our Netflix target,” Salmon noted. “The discount reflects Netflix’s proven free cash flow generation and Disney’s’ mix of Hulu and ESPN+, which are at earlier stages and/or lower scale.”
Cowen’s Doug Creutz summarized his takeaway from the latest results this way: “We don’t think this print changes anyone’s mind on either side,” whether Disney bulls or bears.
“Direct-to-consumer growth is better than Netflix, at least,” Creutz also highlighted. “Disney+ ended the fiscal second quarter with 137.7 million paid subscribers (+7.9 million quarter-over-quarter), slightly above our 7.0 million add estimate. Ex-Hotstar, their 3.7 million adds quarter-over-quarter slightly missed our expectations of 4.0 million adds. Hulu adds of 400,000 … also missed our 1.0 million estimate, while ESPN+ adds of 1.0 million … missed our 1.5 million estimate.” But the expert noted that management indicated that its fiscal first-half Disney+ sub gains were ahead of its expectations.
Creutz’s conclusion: “We think direct-to-consumer growth was better than feared in the wake of the Netflix report, but likely not so strong as to convince skeptics (including us) that the company is comfortably on track for its fiscal year 2024 sub/profitability guidance, which management reiterated.”
Wells Fargo analyst Steven Cahall, in a report entitled “Take the execution risk,” also argued that Disney remains a developing story in streaming, but expressed his confidence that it can deliver on its growth forecasts.
“We did not expect much definitive out of the fiscal second quarter, and as expected few debates were solved,” Cahall wrote. “Disney is focused on driving to its fiscal year 2024 Disney+ subscriber guidance through a massive amount of content spend and an all-hands-on-deck/no-sacred-cows execution strategy. It’s hardly risk-free in light of Netflix stumbles and macro fears. But we think it’s about as clean an execution bull/bear (case) as they come.”
The analyst maintained his “overweight” rating on Disney shares, emphasizing: “This is still a stock we want to own with conviction.” But he cut his stock price target from $182 to $153 “on market multiple compression,” explaining: “We are admittedly in a very different market now with value compression on: 1.) streaming assets; 2.) consumer-facing businesses due to recession; and 3.) market trackers due to higher rates. Disney is all three, so our prior $182 price target is unrealistic.”
Cahall sees a key catalyst for the stock in how many “core net adds” in streaming the Hollywood giant can reach during the second half of its current fiscal year.
“Do you think they can do it?” Cahall summarized the key question for investors now. “We’ll know by November. We still see Disney as a second half of fiscal 2022 story as content ramps to drive subscriber growth. Net adds in the second half need to reach an exit that can approximate the run-rate to reach fiscal year 2024 guidance.”
Here, Cahall is focused on Disney+ streaming subscribers excluding hotstar in India, “because we don’t think investors are all that concerned with hotstar subs any longer.” Disney+ ended its just-reported quarter with 88 million such “core” subs. For 2024, “the midpoint of guidance ex-hotstar is 159 million subs and the low end is 138 million, so call it 150 million as the Disney+ core sub bogey,” Cahall concluded. “That leaves 10 quarters to add 62 million core subs = around 6 million subs per quarter and around 24 million a year.”
The third calendar quarter of 2022 is “the pivotal one as it is guided to demonstrate the run-rate of content deliveries,” Cahall concluded. “Thus, Disney sets up for a seminal stock event that makes or breaks guidance.”
The Wells Fargo expert is bullish. “Management is using everything under the sun to head towards the goal: $32 billion (and growing) in content spend, a late calendar year 2022 AVOD product in the U.S., shows coming off of linear and onto Disney+, more general entertainment/local content and curtailment of licensing,” Cahall highlighted. “When a company of Disney’s scale focuses its collective resources on a singular objective, we think investors would be remiss not consider taking that execution risk.”
Paolo Pescatore, analyst at PP Foresight, lauded Disney’s most recent quarterly performance, but noted its rising content spending and raised questions about its longer-term outlook. “It is apparent that there is too much focus on net adds for all providers” in the industry, Pescatore argued, echoing recent calls on Wall Street for an increased focus on streaming profitability. “Unfortunately, given the nature of streaming, there will be high levels of churn which will impact all providers. This in turn will hit revenues and the bottom line.”
The PP Foresight analyst’s conclusion: “While it seems that Disney is winning the subscription battle for now, let’s not forget it is late to the streaming party. Its broad portfolio of programming, including live sport and entertainment, clearly resonates with households, (but) it will see subs losses at some point. I have said repeatedly that the market is awash with too many services chasing too few dollars.”
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