Streaming subscriber growth is nice, but not if it comes with big streaming losses and a fast-declining traditional TV networks business. That was the message that Wall Street sent Hollywood giants, yet again, in analyst reactions to the latest quarterly results reported by the Walt Disney Co. late 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. But Disney’s direct-to-consumer (DTC), or streaming, unit recorded a quarterly operating loss of $1.47 billion, more than double the $630 million reported in the comparable period of 2021.
Disney’s stock fell sharply in early Wednesday trading. 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 showed healthy growth as we expected, while DTC revenue and operating losses weakened on foreign-exchange headwinds and a mix-shift to lower-average revenue per user (ARPU) bundle and promotional uptake.”
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 lowered estimates primarily reflect greater DTC losses” and slower theme parks profit growth than previously forecast.
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. “DTC margins may improve, but overall margins aren’t,” he warned 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.”
But the expert also highlighted “near-term catalysts,” including “continued robust theme park demand with several levers for future growth, price increases for Disney+/Hulu, the rollout of Disney+’s ad-supported tier on Dec. 8th, the release of Wakanda Forever later this week and Avatar 2 before Christmas, and sports betting optionality at ESPN.”
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 we ever been so incorrect in our forecasting of Disney profits. 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. “Although the statement was obvious and evident in Disney’s financial disclosures, Iger’s comments caused shockwaves through the industry as media stocks cratered and investors began to question the future of linear television,” Nathanson summarized on Wednesday. “In those halcyon days, cord-cutting was running at a somewhat manageable annual rate of 1 percent to 2 percent.”
Over the years, “we have seen other companies’ once great linear businesses hit debilitating cliffs, but Disney, king of affiliate fees with its ESPN crown jewel, continued to hang in,” Nathanson continued. “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.”
But Nollen emphasized the long-term outlook and stock valuation in maintaining his rating. “The results weren’t pretty, and the fiscal first quarter doesn’t look great, but this drops Disney stock to new lows that we think look attractive.”
PP Foresight analyst Paolo Pescatore called the Hollywood giant’s latest results “a disappointing quarter”, saying the report “underlines the challenges a media giant faces in pivoting towards a streaming future.” After all, the “quest for subscribers comes at a cost, and success is not guaranteed.”
Added the expert about Disney: “The journey feels somewhat akin to Netflix’s path. Therefore, expect more bumps ahead and further losses in the streaming business as there’s no silver bullet to profitability.”
Pescatore called trends “worrying given that a recessionary period lies around the corner where users will be forced to make some tough decisions regarding the need to keep on paying or signing up to a slew of services.” But he added: “Encouragingly, Disney is still in stealth mode for subscriber growth. This will be key as Disney+ becomes an anchor service that unlocks value to the Disney universe akin to the iPhone for Apple.”
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