Walt Disney and its CEO Bob Iger got mostly good numbers from analysts on Thursday following the Hollywood conglomerate’s latest quarterly results, but some on Wall Street lowered their price targets slightly, saying it would take more time to progress toward streaming streaming. profitability and other goals.
In early February, Iger’s first earnings update since returning as CEO of Walt Disney included the promise of major restructuring, including a massive 7,000 job loss and a whopping $3 billion in content cost savings, as well as news that streamer Disney+ had lost subscribers to the first time.
Disney’s latest earnings report and conference call late on May 10 gave analysts more to digest and review. Quarterly results beat or met Wall Street expectations for most key metrics, including revenue, with the conglomerate’s streaming loss further narrowing to $659 million in the last quarter, down from a loss of $887 million in the same period a year ago and a loss of $1.1 billion in the last quarter of 2022. However, Disney+ lost 4 million subscribers to end the last quarter with 157.8 million. The bulk of the decline came from Disney+ Hotstar in India, which has a lower average revenue per user (ARPU), while domestic users fell by just 300,000 despite a price hike. Domestic ARPU for Disney+ increased 20 percent year-over-year, while international ARPU, excluding Hotstar, increased 6 percent.
Disney also revealed that it plans to reduce the volume of streaming content and remove some titles from its services. And it plans to combine Hulu content with Disney+ content into a single streaming app in the US by the end of the calendar year, while keeping the services separate. In that context, Iger also shared that Disney has entered into “warm” talks with Comcast about the future of Hulu, in which Disney has a majority stake and Comcast has a minority stake.
Disney shares in pre-market trading fell 5.5 percent to $95.56 as of 8:25 a.m. ET.
Guggenheim analyst Michael Morris maintained its buy rating, but lowered its price target by $5 $125. This “reflects our confidence in the long-term strength and potential for park growth and the renewed focus on profitable growth across the company’s media and entertainment assets,” he explained in a report. “However, we have tempered our estimates for the timing of trend improvement, … and as such, we have lowered our target valuation multiples. He said his Disney valuation “represents a 15 percent premium to comparable multiples for the S&P 500, compared to our prior 20 percent premium.”
SVB Moffett Nathanson‘s Michael Nathanson Similarly, maintained its “outperform” rating on Disney, but lowered its price target by $3 to $127 to reflect its slightly lowered future profit expectations. “It’s very unclear where Disney’s direct-to-consumer margins might end up,” the analyst wrote. “Furthermore, without some significant cuts in future sports licenses, it is not clear at what level linear network margins will stabilize.”
Plus, Nathanson cited an extra question mark. “As the Hulu negotiations with Comcast are still looming, we think it would be unwise for Disney to start talking about streaming profitability in 2025 before that shutdown. As a result, any comment about cost savings and revenue synergies that would result from the uniting Hulu and Disney+ globally, have to wait for this tug-of-war to be resolved. However, the MoffettNathanson expert also shared an optimistic view of Hulu’s profitability as a wholly owned Disney’s streaming business. “Logically, we’re struggling to see how the combined $1 billion-plus in fiscal year 2023 US/Canada Disney+ and Hulu SVOD revenue doesn’t have margins of at least 20 percent.”
Wells Fargo‘s Steven Callalwho has an overweight rating on Disney stock with a price target of $147saw no need to change either.
In a report titled “Subs vs. Profit,” he argued that “the debates at Disney are happening, but they feel tectonic in mass and speed. … This was an execution quarter for Disney as Bob Iger Disney continues to move toward long-term direct-to-consumer (DTC) profitability. Cahall made “minor” adjustments to his earnings forecast, but reaffirmed his “major bullishness” and called Disney his “favorite long-term idea” among the stocks he covers.
However, he acknowledged that some investors are likely to sit on the fence for a while. “There is a reorientation going on from sub-growth to profit, driven by pricing, advertising and cost actions,” he explained. “Investors are likely to remain neutral until direct-to-consumer bottom-line visibility improves.”
The Wells Fargo expert also dove into Hulu’s future. “’23 has seen a lot of buzz about Hulu, and Disney said Disney+ and Hulu are moving toward a domestic one-app experience,” Cahall wrote. “This should improve user experience and ad sales and defuse the debate that Disney is a seller. We (have) argued… that Disney should keep Hulu and maintain its No. 1 share of US TV. For those concerned about the billions Disney could spend to buy out Comcast’s stake in Hulu, he pointed out, “We think Disney can afford the Hulu stake, a small dividend and the associated content pipeline.”
In the meantime, Wolf research analyst Peter Supino maintained its “outperform” rating and $133 price target on Disney, but wrote that “our estimates are being revised.” His opinion, as expressed in the headline of his report: “No drama, but no spark.”
“The outlook appears weaker due to (1) weak DTC sub-results and commentary that the ‘softness we saw in (fiscal) domestic Disney+ net additions in Q2 may linger in Q3’, with hopes pinned on content releases, (2) advertising weakness that “may continue into the second half of the fiscal year” and (3) inflationary pressures and difficult domestic comparisons across parks.”
T. D. Cowen‘s Doug Creutz also said his Disney financial projections and model were revised after the earnings update, but reiterated his “market performance” assessment with a $94 share price target. He summarized his conclusions in the headline of his report: “No big surprise in fiscal second quarter; Push Towards DTC profitability continues.”
bank of America analyst Jessica Reif Ehrlich said the commentary on the results and earnings call underlined the significant change at Disney, but also emphasized that the process would take time. “The presence of Bob Iger as CEO should support investor sentiment,” she told investors, sticking to her “buy” rating and $135 share price target.
“Steps forward, but many questions remain,” it said Macquarie analyst Tim Nollen‘s takeaway from the latest earnings report and phone call. “Reports have been positive, but the current situation is mixed: Disney is making strides in its cost-cutting and operational efficiency efforts amid a deteriorating linear TV business, both structural and cyclical; DTC subs fell for the second straight quarter, but ARPU rose and operating losses fell nicely.” His conclusion: “We believe Disney has the essential assets to successfully transition to streaming, but it’s a multifaceted effort.” Nollen still has an “outperform” rating on Disney stock; his price target is up $125.
Beyond Wall Street, Jamie Lumleyanalyst at Third Bridge, commented on Disney’s earnings update, saying, “After a round of layoffs and restructuring, Disney is starting to make some progress in controlling costs. However, the direct-to-consumer segment remains a loss leader and there remains a gap between where the company is and where it wants to be.”
Sharing insights Third Bridge gathered from industry experts, he added: “While cost-consciousness is becoming increasingly central, our experts emphasize the continued need for Disney to invest in its IP. With franchise movies like Ant-Man and the Wasp: Quantumania And Thor: Love and Thunder because we’re not delivering box office results as consistently as Disney has seen in the past, there’s some concern that momentum for the entertainment segment could stagnate.
And on Disney’s plan to combine its two big streaming brands into one app, Lumley noted, “Our experts say that bringing Disney+ and Hulu together could make a big difference from a brand and marketing perspective, which could ultimately be beneficial to the increase efficiency with the company.”
