Disney+ Growth Doesn’t Outweigh Streaming Losses, Pay TV Challenges as Analysts Cut Stock Price Targets
Streaming subscriber growth can be nice, but it is not if it comes at the expense of streaming losses and a rapidly-declining traditional TV network business. Wall Street was clear in its reaction to the latest quarterly results from the Walt Disney Co. on Tuesday. Financial observers cut their earnings estimates and stock price targets, while also mentioning positive streaming subscriber trends.
After all, Disney added 12.1 million subscribers at streamer Disney in the fiscal fourth quarter ended Oct. 1, which included the launch of such originals as She-Hulk: Attorney at Law and Andor, bringing the streamer’s total user base to 164 million. Wrapping up earnings season for industry majors, Disney also reached 236 million overall streaming subscribers. However, Disney’s direct to consumer (DTC) streaming unit suffered a quarter-end operating loss of $1. 47 billion, more than double the $630 million reported in the comparable period of 2021.
In early Wednesday trading, Disney stock dropped sharply. As of 9: 40 a.m. ET, it was down 10.7 percent at $89. 22 after earlier hitting a new 52-week low of $88.40.
Guggenheim analyst Michael Morris maintained his “buy” rating on Disney, but slashed his stock price target by $30 to $115 in a report entitled “These Are Not the Results You’re Looking For.”
“One quarter removed from strong profit growth and an upbeat outlook, Disney’s fiscal fourth-quarter revenue of $20.2 billion and segment operating income of $1.6 billion were below Street expectations of $21.2 billion and $2.3 billion,” Morris wrote. “Global SVOD subscribers experienced healthy growth as we anticipated, while DTC revenue declined due to foreign-exchange headwinds.
Added Morris: “Management’s 2023 outlook smacked down the bull case on total company revenue and profit growth in high-single-digit percentage versus pre-print consensus of 12.5 percent and 32.5 percent. Our lower estimates reflect higher DTC losses and slower profit growth at the theme parks than previously predicted.
Cowen analyst Doug Creutz also stuck to his “market perform” rating on Disney, but reduced his stock price target from $124 to $94 “given a roughly 35 percent cut” to his fiscal year 2023 earnings per share projection. He stated that DTC margins could improve, but overall margins aren’t.” In the subject of his report.
Meanwhile, Bank of America’s Jessica Reif Ehrlich had a more encouraging headline for her report: “Better beneath the surface than it appears.” She reiterated her “buy” rating, but lowered her price objective by $12 to $115 to reflect her reduced earnings estimates “on management’s outlook, including headwinds in linear networks and sequentially improving DTC losses.”
The expert also pointed out “near-term catalysts,” such as “continued strong theme park demand with multiple levers for future growth,” price increases for Disney /Hulu on Dec. 8, the rollout of Disney ad-supported pricing tier on December 8th, the release Wakanda forever later in the week, and Avatar prior to Christmas. There is also an option at ESPN HTML4
Fiscal 2023 guidance was in focus for MoffettNathanson analyst Michael Nathanson. “The biggest controversy from last night’s Disney’s fiscal fourth-quarter 2022 earnings call was management guidance that fiscal year 2023 segment earnings before interest and taxes (EBIT) would grow in the high single digits versus consensus growth of 25 percent and our own estimate of 34 percent,” offered Nathanson. “Rarely have our forecasts of Disney profits been so wrong,” said Nathanson. Given the company’s confidence that parks trends appear resilient, it appears that the culprit for the massive earnings downgrade is much higher than expected DTC losses and significant declines at linear networks.”
While Nathanson reiterated his “market perform” rating on Disney shares, he cut his stock price target by $30 to $100, citing his lower earnings forecasts for fiscal year 2025.
The analyst recalled how in August 2015 Disney’s then-CEO Bob Iger noted “modest subscriber losses” at ESPN due to cord-cutting. Nathanson summarized the comments on Wednesday. “Although it was obvious and evident in Disney’s financial disclosures. However, Iger’s comments caused shockwaves throughout the industry as media stocks crashed and investors began questioning the future of linear TV.” “In those halcyon times, cord-cutting was running at an enviable annual rate of 1 to 2 percent.”
Nathanson said that “we have seen other companies’ once great linear businesses hit debilitating rocks, but Disney was king of affiliate fees with ESPN’s crown jewel,” Nathanson added. “Then just a few months ago, Disney’s now ex-CEO Iger stated ‘linear TV and satellite is marching towards a great precipice and it will be pushed off.’ With Disney management’s FY 2023 guidance, it appears that that cliff may be closer than any of us thought.”
Macquarie analyst Tim Nollen reiterated his “outperform” rating on Disney’s stock, dropping his price target by $20 to $120. While he called streaming subscriber numbers “pleasing,” he noted that quarterly operating losses in streaming “were heavier than expected at $1.5 billion, mainly on revenue weakness as (average revenue per user) ARPU fell in the U.S. – some 40 percent of subs are now on the Disney / ESPN /Hulu bundle, which Disney sees mitigating churn.”
Nollen, however, emphasized the long-term outlook as well as stock valuation when he maintained his rating. “The results weren’t great and the fiscal first quarter didn’t look great but this drops Disney stock at new lows we think are attractive.”
Paolo Pescatore, PP Foresight analyst, called the latest results of the Hollywood giant “a disappointing quarter”. He said that the report “underlines how media giants face the challenges in pivoting towards a streamable future.”
The expert on Disney said that the journey is somewhat similar to Netflix’s. Expect more bumps and losses in the streaming business, as there is no silver bullet to profitability.
This will be key as Disney becomes an anchor service that unlocks value to the Disney universe akin to the iPhone for Apple. This will be crucial as Disney is a key anchor service that unlocks the Disney universe’s value, similar to the iPhone for Apple .
I have been writing professionally for over 20 years and have a deep understanding of the psychological and emotional elements that affect people. I’m an experienced ghostwriter and editor, as well as an award-winning author of five novels.