UPDATED: Shares of Disney slipped as much as 9% in trading Thursday after the media conglomerate reported earnings for the first three months of 2023. Disney’s earnings report showed progress on the cost-cutting front — with streaming losses narrowing for the quarter — but analysts cited a weak advertising outlook and uncertainty over when its streaming business can contribute to the bottom line.
At market close Thursday, Disney’s stock price was $92.31/share, down 8.7% for the day, and off its 52-week high of $126.48.
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Disney+ lost 4 million subscribers for the quarter ended April 1, including a loss of 300,000 in the U.S./Canada. But the company narrowed its streaming losses by $400 million, down 26% year over year, and Disney said it would remove content from Disney+ to cut costs while also expecting to raise prices on the ad-free Disney+ tier. In addition, CEO Bob Iger announced that the company would launch an integrated Disney+/Hulu “one-app experience” in the U.S. by the end of 2023 — indicating Disney’s desire to hold on to Hulu.
However, as the Hulu negotiations with Comcast are still in flux, “we believe it would be unwise for Disney to start talking up 2025 streaming profitability ahead of that closure,” MoffettNathanson senior analyst Michael Nathanson wrote in a research note. “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,” the analyst wrote. In addition, the biggest unknown variable in Disney’s linear TV biz is the impact of higher sports-rights costs, according to Nathanson. ESPN has pending renewals with the NBA, UFC, Pac-12 and the College Football Playoffs in the U.S.
That said, despite Disney’s massive investment — and losses — in its streaming segment and the continuing collapse of linear networks, “the long-term profit picture should be brighter than the market knows and thus we think the stock is undervalued,” Nathanson opined.
Under the terms of the Disney-Comcast deal for Hulu, the guaranteed minimum value of Hulu is $27.5 billion, meaning Comcast’s 33% stake is worth a minimum of about $9.2 billion. The integration of Hulu into Disney+ does not mean that Disney “would be willing to pay any price for the Comcast stake,” Morningstar analyst Neil Macker wrote in a research note. The majority of the content on Hulu comes from Disney and other third parties outside of Comcast, he pointed out; as such, in the U.S., “Disney could rebrand the Hulu vertical as Star with minimal content loss.”
On the call, Iger said Disney has had “constructive” talks with Comcast over a potential Hulu deal but declined to predict any particular outcome. “[W]here we are headed is for one experience, with general entertainment content on Disney+,” he told analysts. “If, ultimately, Hulu is that solution… we’re bullish about that.”
Morningstar lowered its “fair value estimate” on Disney from $155 to $145/share, citing slower streaming subscriber gains coupled with a faster decline at its linear TV networks.
Disney posted a disappointing fiscal second quarter of 2023 as “Iger has begun to make his mark,” Macker wrote in the note. Disney’s theme parks “remained impressive with strong top-and bottom-line results and streaming losses continued to shrink, but Disney+ lost subscribers and Hulu posted very modest gains.” While the Mouse House’s direct-to-consumer segment appears on the way to profitability by the end of fiscal 2024, “we think Disney needs to expand the DTC customer base and drive stronger top-line growth to replace declining linear networks revenue.”
Disney is “in the early stages of restructuring its Media businesses, taking significant cost out and revisiting its content monetization strategy,” Morgan Stanley analyst Benjamin Swinburne wrote in a note to clients. The analyst maintained an “overweight” rating on the stock.
More than 40% of Disney+ subscribers in the U.S. are bundled with Hulu. And, per Swinburne’s analysis, the move to integrate Hulu programming into Disney+ “likely increases the likelihood” of Disney’s expected buyout of Comcast’s Hulu stake early next year.
While Disney’s overall quarterly results “were modestly ahead of our expectations in overall adjusted operating income,” the outlook for the second half of its 2023 fiscal year “suggests our full year estimates will need to be revised lower — primarily due to the weak ad environment,” according to the analyst. Swinburne called out “a clear prioritization by management on maximizing media revenues and returns in an admittedly difficult environment.”
Macquarie analyst Tim Nollen maintained an “outperform” rating on Disney stock with a 12-month price target of $125/share. “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; Parks were robust again.”
Disney appears on track to meet or beat its $5.5 billion cost-savings target over the next several years, Nollen wrote, although he added that the company will incur a $1.5 billion-$1.8 billion impairment charge as it removes some content from Disney+.
“Coming off a round of layoffs and restructuring, Disney is starting to make some progress at reining in costs,” noted Third Bridge analyst Jamie Lumley. ‘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.”
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