Analysts cut price targets for Disney and debate the streaming outlook, causing the stock to fall.
Disney+ attracted just 2.1 million members in its slowest-growth quarter since its inception two years ago, but one Wall Street analyst thinks "momentum may increase as trust in the content slate rises, similar to the dynamic we witnessed with Netflix."
With Disney+ subscriber growth stalling in the most recent quarter, as revealed Wednesday after the stock market close, and earnings falling short of expectations across the board, Walt Disney's stock fell more than 8% in early Thursday trading and is facing a Netflix moment, according to Wall Street experts.
That's because, in the first half of 2021, a reduced pipeline of original content and slower subscriber gains following a coronavirus pandemic-fueled 2020 weighed on Netflix's stock until investor and analyst sentiment improved ahead of its third-quarter earnings update, which showed increased momentum.
Disney will be trying to reproduce that if it sticks to its longer-term streaming subscriber goal range, which is now a significant focus for investors. Several Wall Street analysts recently lowered their Disney+ projections. After Wednesday's earnings report, Atlantic Equities analyst Hamilton Faber lowered Disney's stock from "overweight" to "neutral" and reduced his price target from $219 to $172, stating that the company's customer reach in areas where Disney+ has debuted was reaching maturity.
Others maintained their stock recommendations on Thursday, but noted that investors would need to be patient, and Disney will need to spend more. After all, the entertainment behemoth said that it does not plan to reach its full original content and streaming subscriber growth stride until next year, when new programming and market launches would offer a boost. This should begin to have an effect in the second half of its fiscal year 2022, which began on Oct. 3, with the third calendar-year quarter expected to be the first in which the service will release originals from all of its main brands.
It's no surprise, however, that Cowen analyst Doug Creutz summed up the Hollywood behemoth's streaming prognosis on Thursday: "Disney+ subscriber growth projected to remain sluggish until the second part of fiscal 2022."
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MoffettNathanson analyst Michael Nathanson agreed, writing in a Thursday report: "The admission that Disney+ growth will re-accelerate when content spending re-accelerates is consistent with Netflix's recent experience, where the growth slumber created by the pandemic's pull-forward of subscribers was finally shattered by record amounts of new content dropped in the last few months of this year."
Guggenheim analyst Michael Morris agreed, saying, "We think momentum may rise as trust in the content slate grows, similar to the dynamic we saw with Netflix in the third quarter." "Fueled by a healthy but delayed content pipeline, management expects net additions in the second half of 2022 to be much higher than in the first half, with the bulk of titles launching in July–September," he said. Morris said that as a consequence of the manufacturing delays, Disney now anticipates fiscal year 2022 to be the highest year of losses for Disney+ rather than fiscal year 2021.
Disney+ added only 2.1 million subscribers in the latest period ended on Oct. 2 to reach 118.1 million, its slowest growth quarter since its launch two years ago, but the entertainment conglomerate reiterated its guidance for reaching 230-260 million Disney+ subscribers by the end of fiscal year 2024. Morris also said that this would need more program funding. "Disney intends to boost its prior content spending guidance (formerly $8-9 billion in fiscal 2024) as it invests in additional local and regional programming (340-plus local original programs now in development)," he said.
Creutz, on the other hand, raised reservations about the Disney+ content strategy, which some think should involve a greater emphasis on more adult-oriented programming to broaden offers outside Disney's usual fan base. "Management anticipates Disney+ additions in fiscal 2022 to be back half-loaded based on a fiscal fourth-quarter content'surge' (typical of the content pipeline in fiscal 2023 and beyond) and the timing of certain additional regional launches," he said. "We remain doubtful that additional Star Wars/Marvel/animated/family programming will be enough to bring Disney+ up to parity with Netflix."
Todd Juenger, a Bernstein analyst, was even more harsh. "The pace of Disney+ net additions remains significantly below the run-rate necessary to reach the midpoint of fiscal year 2024 forecast," he stated in his assessment. "Aside from more market openings, the re-acceleration is expected to occur when the full cadence of new original content begins reaching the service in the fourth quarter of fiscal 2022." However, we feel the basic concept (i.e., more content Equals more subscribers) is still questionable."
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"Who is this customer who wasn't interested in Disney+ when it had the library and some original Marvel, Star Wars stuff, but will become interested when there is double the quantity of the same brands of original content?" he said. We have yet to encounter a toddler who declines one scoop of ice cream but accepts two."
"Our key lesson from Disney is that the resuming slope of the Disney+ subscription curve, and the recovery of revenue/margin at parks, will happen later than the market had anticipated, if at all," Juenger concluded. Investors will now have to wait until the second half of fiscal 2022 to witness acceleration in both — and in the fiscal third quarter, it will come from new additions (new Disney+ markets, cruise ship debut) rather than same-store organic" growth.
Disney shares were down 8.4 percent at $159.80 as of 10 a.m. ET Thursday.
Following Disney's recent earnings announcement, some Wall Street analysts reduced their profit expectations and stock price predictions.
Creutz, who rates Disney shares as "market perform," reduced his price objective by $10 to $137, citing "costs that seem to be escalating throughout the company." Not only will spending on streaming content increase, but linear TV networks "will face a $500 million profits before interest and taxes disadvantage in the first quarter of fiscal 2022, mostly owing to increased sports programming expenditures," he said. "Inflationary (management's word) labor cost and cost of product sold pressure is projected to at least partly offset the revenue rebound at parks," and management is also predicting increased capital costs in the fiscal year that has just begun. "While part of these growing expenses represent investments in future development," Creutz said, "we believe investors have already priced in future growth without accounting for the expanding cost base."
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Nathanson, who has a "neutral" rating on the company, has also reduced his earnings predictions and stock price goal by $5 to $175 due to rising spending in several businesses. And Juenger's was reduced by $3 to $164.
BMO Capital Markets analyst Daniel Salmon has a "market perform" rating on Disney and reduced his stock price objective by $15 to $180 on Thursday. He kept his streaming business valuation at $125 per share, a discount to Netflix's "proven free cash flow generation," but dropped his "core value" to $55 per share due to "reduced projections," including for theme parks and TV networks.
Tuna Amobi, a CFRA Research analyst, maintained a more aggressive "buy" recommendation on Disney but reduced his stock price objective by $20 to $200.
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Disney Stock Drops as Analysts Cut Price Targets, Debate Streaming Outlook
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