Published - May 12th, 2023 @ 15:15 PM (CET)

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Wolfe Research downgraded Disney, impacting stock prices.

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Shares of Walt Disney experienced a significant fall recently, following a downgrade at Wolfe Research and a miss on its Disney+ Q1 subscriber targets. This has sparked concerns among analysts regarding the future profitability of the company's direct-to-consumer (DTC) business.

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Wolfe Research analysts have lowered their rating of Disney stock from Outperform to Peer Perform. They attributed this downgrade to the ongoing deterioration of Disney's DTC subscriber base and the outlook for its linear TV business. However, they acknowledged several positive aspects, such as growth in Disney's Parks, cost cuts, and DTC average revenue per user (ARPU) growth. Still, they noted that these factors were already reflected in the consensus.

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By 2024, analysts predict a $500M revenue drop due to fewer Disney+ subscribers.

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Analysts predict a reduction in advertising and affiliate revenue of about $500M by 2024, primarily due to a drop in Disney+ subscriptions. They also foresee the potential for further cost cuts, including integrating Hulu into Disney+, international DTC shutdowns, international ESPN sports rights, and SG&A cuts. Nevertheless, they stressed the need for high incremental margin DTC revenue growth, given its importance to Disney's multiple, expressing growing skepticism.

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The 2024 operating income forecast was cut by 5% due to the anticipated slower and more gradual path to DTC profitability. Despite the 8.7% drop in Disney's shares and strong trajectories for Parks and cost reduction, analysts expressed concerns about the current consumer environment and deteriorating DTC and linear revenue growth, which may pose risks to forecasting and time decay.

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Disney's quarterly results announced recently, showed a miss on earnings per share estimates and a shedding of 4 million subscribers for Disney+ in the quarter. While streaming losses narrowed amid Disney's ongoing efforts to cut costs by $5.5 billion this year, the subscriber miss is a significant concern.

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This report comes after Disney's announcement of its new three-pronged business reorganization under the divisions of Disney Entertainment, ESPN, and Disney Parks, Experiences, and Products. The move, led by CEO Bob Iger, is an effort to streamline the media giant and reorient its strategy. Reporting under this new structure will commence later this year.

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Despite the setback in Disney+ subscribers, Disney's theme parks, especially international ones, continue to perform robustly. The quarter's operating income for this segment was $2.17 billion, mirroring trends at competitors such as Comcast's Universal. 

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Furthermore, streaming losses for Disney narrowed to $659 million in the second quarter, better than consensus estimates of an $850 million loss and a significant improvement from a $887 million loss in the year-ago period. Although, the company reported a streaming loss of $1.1 billion in Q1 and a $1.5 billion loss in Q4.

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Despite challenges in DTC and linear TV, Disney's Parks division remains strong.

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In conclusion, while Disney continues to grapple with challenges in its DTC and linear TV segments, cost-cutting efforts and strong performances from its Parks division offer some respite. However, the road to profitability in the DTC space may be more gradual and slower than anticipated.

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