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It has been a tough earnings season for Netflix and such Hollywood giants as Comcast/NBCUniversal and Warner Bros. Discovery as their streaming businesses have hit growth walls. Disney, however, lived up to its Magic Kingdom moniker, with Disney+ beating Wall Street estimates to add 14.4 million subscribers during its third fiscal quarter to reach 152.1 million subs and all its streamers, including Hulu and ESPN+, overtaking Netflix with more than 221 million subs.
The streaming story was complicated a bit though by the fact that Disney acknowledged its growth was coming mostly from foreign markets and also unveiled U.S. streaming price hikes and a December launch date for an advertising-supported cheaper version of Disney+. At least one Wall Street analyst expressed concern that boosting subscription prices — the U.S. ad-supported version of Disney+ will cost $8 a month, while the ad-free version of the service will be $11 a month — at a time of rising inflation could backfire.
All in all, however, investors seemed to embrace the latest updates from the Mouse House, led by CEO Bob Chapek, as a sign of a streaming business that can become more profitable and still grow. After all, Wall Street has moved away from focusing on subscriber growth as the primary success metric to judge Hollywood giants’ streaming push, increasingly focusing on the profitability outlook. In early Thursday trading, Disney’s stock shot up more than the broader market.
Helping the bull run was the fact that Guggenheim analyst Michael Morris upgraded his rating on Disney shares from “neutral” to “buy” and his price target by $35 to $145. “We raise our profit estimates…and our price target valuation multiple to reflect stronger than previously forecast trends,” he wrote in a report and highlighted in its title: “Confident Streaming Price Increases Bolster Our Valuation.”
Morris noted that “significant price increases across the domestic streaming portfolio effective Dec. 8 were ahead of our expectations and lean into a strong price-value relationship and flexibility from an ad-tier launch.” And the analyst argued that “content cost management, maintaining a low-$30 billion annual spend rate for several years, should bolster (Disney’s) streaming profitability trajectory.”
Bank of America’s analyst team, led by Jessica Reif Ehrlich, reiterated its “buy” rating and increased its price target from $122 to $144, citing theme parks “firing on all cylinders” as well as Disney+ “significantly beating our expectations.”
CFRA Research’s Kenneth Leon maintained his “hold” rating on the stock, but also raised his price target by $20 to $130, applying a stock price multiple “above peers given leading franchises.”
And Goldman Sachs analyst Brett Feldman, who has a “buy” rating on Disney, boosted his financial estimates and his stock price target by $10 to $140. “We expect a positive reaction to Disney’s planned price increases across its various streaming services in the U.S. and Canada. A key surprise is that Disney is not launching its ad-supported tier at a lower price point,” he said. “As such, there is no risk of average revenue per user dilution from subscribers downgrading. While we see some risk that subs may churn instead of watching ads or paying more, we believe that the alignment of these pricing moves with a material expansion in new original content should minimize this potential headwind. Further, as noted by management on the call, the ad-supported tier is likely to launch with a light ad load, which should not be too disruptive to subscribers’ viewing experiences.”
Wells Fargo analyst Steven Cahall, who has an “overweight” rating on Disney, also pushed his financial estimates higher and, as a result, increased his stock price target. The latter jumped by $15 to $145. He also boosted his streaming business valuation for Disney from $100 billion to $110 billion, which now matches his Netflix model. Arguing that the latest results “will assuage a lot of fears,” Cahall wrote: “It now looks like Disney+ is tracking towards tightened and trimmed sub guidance, while the ad-supported tier and price increases and content rationalization (equal) a much improved long-term profit outlook.”
The analyst suggested: “Along with Netflix and Warner Bros. Discovery making similar rational moves, we think investors will pay more for at-scale streaming businesses.”
Cahall also addressed Disney’s revisions to its ambitious forecasts for Disney+. The company on Wednesday separated its guidance and is now projecting to hit 135 million-165 million Disney+ subscribers by 2024 and up to 80 million Disney+ Hotstar subscribers in India. In the current quarter, it expects sub growth to improve, according to management.
“Now it’s about the content,” Cahall argued, explaining: “The next catalyst for Disney is delivering on the modest core net add acceleration in the fiscal fourth quarter, which, if successful, would be evidence that the content strategy is working. A big miss versus the short-term guidance would cause investors to lose this recent enthusiasm, whereas delivering likely means investors would [nearly] believe the longer-term outlook.”
Some Wall Street experts reduced their forecasts though or raised questions about the looming price increases.
Credit Suisse analyst Douglas Mitchelson, for example, cut his Disney stock price target by $13 to $157. “Management’s guidance for streaming investment suggests materially greater losses for the fiscal fourth quarter 2022 and into fiscal year 2023, though still hitting breakeven during fiscal 2024,” he noted. “Studio profitability will remain depressed during the pivot away from third-party licensing,” as “streaming plus studio will be about $4 billion worse due to the licensing pivot to Disney+.”
And Cowen’s Doug Creutz, who has a “market perform” rating and $124 price target on Disney’s stock, expressed concern that the coming streaming price increases in the U.S. “may ruin” positive trends. “The real news was around the large price increases the company announced for its direct-to-consumer (DTC) plans in the U.S. In our view, the move greatly widens the range of potential outcomes for Disney over the next two years.”
He even highlighted: “It is difficult to relate our thoughts about Disney’s DTC price increases without using editorially forbidden words about risking money on uncertain outcomes.” For example, Creutz addressed the “roughly 40 percent hike from $7.99 per month to $10.99 for ad-free Disney+,” arguing: “While we believe the company underpriced Disney+ at launch at $6.99, the $3 price hike here seems very aggressive, especially at a time when economically pressured consumers are cutting back discretionary spending.”
He sees the price hikes as moves that “risk increasing U.S. churn on all three Disney DTC products, potentially dramatically.” Creutz’s conclusion: “We believe that historically, Netflix has seen elevated churn for 3-6 months following price increases, and they have never tried to put through one as big as Disney is attempting.”
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