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Walt Disney and its CEO Bob Iger mostly earned good grades from analysts on Thursday following the Hollywood conglomerate’s latest quarterly results, but some on Wall Street slightly lowered their stock price targets, saying progress towards streaming profitability and other goals would take more time.
In early February, Iger’s first earnings update since his return as Walt Disney CEO featured the promise of a big restructuring, including a massive 7,000 job cuts and a whopping $3 billion in content cost savings, as well as news that streamer Disney+ had lost subscribers for the first time.
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Disney’s latest earnings report and conference call late on May 10 gave analysts more to digest and assess. Quarterly results beat or met Wall Street expectations on most key metrics, including revenue, with the conglomerate’s streaming loss continuing to narrow by hitting $659 million in the latest quarter, down from a loss of $887 million in the comparable year-ago period and a loss of $1.1 billion in the final quarter of 2022. However, Disney+ lost 4 million subscribers to end the latest quarter with 157.8 million. Most of the drop came at Disney+ Hotstar in India, which has lower average revenue per user (ARPU), while domestic users only fell by 300,000 despite a price increase. Domestic ARPU for Disney+ jumped 20 percent year-over-year, while international ARPU, excluding, Hotstar, climbed 6 percent.
Disney also unveiled that it plans to reduce its volume of streaming content and remove some titles from its services. And it plans to combine Hulu content with Disney+ content into one streaming app in the U.S. by the end of the calendar year, while keeping the services separate. Iger in that context also shared that Disney has started “cordial” conversations with Comcast about the future of Hulu, in which Disney holds a majority and Comcast a minority stake.
Disney shares in pre-market trading were down 5.5 percent to $95.56 as of 8:25 a.m. ET.
Guggenheim analyst Michael Morris maintained his “buy” rating, but cut his stock price target by $5 of $125. This “reflects our confidence in the long-term strength and potential for parks growth and the renewed focus on profitable growth at 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 MoffettNathanson‘s Michael Nathanson similarly maintained his “outperform” rating on Disney, but reduced his stock price target by $3 to $127 to reflect his slightly lowered future earnings estimates. “It is very unclear where Disney’s direct-to-consumer margins could end up,” the analyst wrote. “Further, without some significant cuts in future sports licenses, it is not obvious at what level linear networks margins stabilize.”
Plus, Nathanson cited an additional question mark. “As the Hulu negotiations with Comcast are still looming, we believe it would be unwise for Disney to start talking up 2025 streaming profitability ahead of that closure. As a result, any commentary about cost savings and revenue synergies that would arise from uniting Hulu and Disney+ globally will have to wait until this tug of war is resolved.” However, the MoffettNathanson expert also shared a bullish take on the profitability of Hulu as a fully owned part of Disney’s streaming business. “Logically, we struggle to see how the combined $10 billion-plus in fiscal year 2023 U.S./Canada Disney+ and Hulu SVOD revenue doesn’t have margins of at least 20 percent.”
Wells Fargo‘s Steven Cahall, who has an “overweight” rating on Disney shares with a stock price target of $147, saw no need to change either.
In a report entitled “Subs versus profits,” he argued that “the debates at Disney are playing out, but they feel tectonic in mass and velocity. … This was an execution quarter for Disney as Bob Iger continues to evolve Disney towards 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 will likely sit on the fence for a while. “A refocus is ongoing from sub growth to profits, driven by pricing, ads 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 the future of Hulu. “’23 has seen much ado about Hulu, and Disney said Disney+ and Hulu are headed towards a domestic one-app experience,” Cahall wrote. “This should improve user experience, ad sales and quash the debate that Disney is a seller. We (have) argued … that Disney should keep Hulu and maintain its number 1 share in U.S. TV.” For those worried about the billions that Disney could end up shelling out to buy out Comcast’s stake in Hulu, he pointed out: “We think Disney can afford the Hulu stake, a small dividend and its content pipeline.”
Meanwhile, Wolfe Research analyst Peter Supino maintained his “outperform” rating and $133 stock price target on Disney, but wrote that “our estimates are under review.” His take, as expressed in the headline of his report: “No Drama, but No Spark.”
“The outlook seems weaker due to (1) weak DTC sub results and commentary that the ‘softness we saw in the (fiscal) second-quarter domestic Disney+ net adds may linger into the third quarter,’ with hopes pinned on content releases, (2) advertising weakness which ‘may continue into the back half of the fiscal year’ and (3) inflationary pressures and tough domestic comparisons at parks.”
TD Cowen‘s Doug Creutz also said that his Disney financial forecasts and model were under review following the earnings update, but he reiterated his “market perform” rating with a $94 stock price target. He summarized his takeaways in the headline of his report this way: “No Major Surprise in the Fiscal Second Quarter; Push Towards DTC Profitability Continues.”
Bank of America analyst Jessica Reif Ehrlich said the results and earnings call commentary underlined 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 stock price target.
“Steps forward, but lots of ongoing questions,” was Macquarie analyst Tim Nollen’s takeaway from the latest earnings report and call. “The messaging was positive, but the current situation is mixed: Disney is making headway in its cost-saving and operating-efficiency efforts amid a deteriorating linear TV business, both structurally and cyclically; DTC subs fell for the second straight quarter, but ARPU rose and operating losses narrowed nicely.” His conclusion: “We believe Disney has the essential assets to successfully transition to streaming, but it’s a multi-faceted effort.” Nollen continues to have an “outperform” rating on Disney shares; his stock price target stands at $125.
Beyond Wall Street, Jamie Lumley, analyst at Third Bridge, commented on Disney’s earnings update, saying: “Coming off a round of layoffs and restructuring, Disney is starting to make some progress at reigning in costs. However, the direct-to-consumer segment continues to be a loss leader, and there remains a gap between where the company is and where it wants to be.”
Sharing insights that Third Bridge has collected from industry experts, he added: “While being cost conscious is increasingly in focus, our experts highlight the continued need for Disney to invest in its IP. With franchise films like Ant-Man and the Wasp: Quantumania and Thor: Love and Thunder not delivering box office results as consistently as Disney has seen in the past, there is some concern that momentum could stall for the entertainment segment.”
And on Disney’s plan to combine its two big streaming brands in one app, Lumley noted: “Our experts say that bringing together Disney+ and Hulu could make a big difference from a branding and marketing perspective, which ultimately could be helpful for driving efficiencies with the business.”
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