Disney Analyst Upgrades Stock, Admits "Our Call Has Been Dead Wrong"

Walt Disney CEO Bob Chapek at the company’s investor day 2020

Walt Disney CEO Bob Chapek at the company’s investor day 2020

New CEO Bob Chapek "surprised us, leaning far harder into streaming," writes LightShed Partners' Richard Greenfield.

LightShed Partners analyst Richard Greenfield on Friday upgraded his rating on the stock of the Walt Disney Co. from "sell"  to "neutral," acknowledging that "our call has been dead wrong" and new CEO Bob Chapek "surprised us, leaning far harder into streaming."

In early May, the Wall Street expert downgraded Disney. "At the time we focused on how the market under-appreciated the impact of COVID-19 on fiscal 2020-2021 earnings," he explained in a Friday report. "We knew numbers needed to come down significantly and expected the stock to follow, especially as leverage far exceeded historical norms. However, even 25 years into our analyst career, the market is still teaching us new lessons. Shortly after our call, the market (including Disney investors) broadly began to move past COVID and look forward to a 'normal' world."

He also mentioned the work of Chapek and his team, highlighting: "Disney management surprised us by recognizing the urgency of leaning much more heavily into streaming at the expense of near-term earnings – something for which we have advocated for years. And investors have rewarded Disney’s wise decision."

Greenfield also noted that Disney's decision to increased content spending on streaming service Disney+ to more than $8 billion by 2024 compared to a target of $4 billion set just a year ago "is a dramatic acceleration, illustrating management now understands far greater spending is needed to accelerate gross adds, increase engagement to drive average revenue per user and reduce churn. And he said "we would not be surprised to see this number rise materially."

And Greenfield admitted: "We believed that the more forward-thinking and digitally savvy Kevin Mayer was a better choice to create the vision for Disney’s future and execute on that strategy." But Chapek "has impressed us so far and in many ways is following the playbook that we expected Mayer to utilize if he had been made CEO."

In his report, the analyst also touched on the more traditional media assets of the Hollywood giant, arguing that "legacy TV assets, including ESPN, no longer matter," adding that "Netflix only has to worry about streaming, whereas Disney has to think about how its investment in streaming cannibalizes its strong free cash flow producing legacy television assets."

Highlighting that he still believes "there is no economic model for ESPN to be anywhere near as profitable as it is today in a direct-to-consumer world," Greenfield concluded: "The reality is most investors now agree with us. What we missed is that investors simply do not care. While virtually every investor we talk to would like to see Disney spin off its legacy broadcast/cable network assets, especially ESPN as we have suggested, they believe any value from a direct-to-consumer sports streaming business is a net positive compared to the legacy business simply evaporating over the next five to six years."