Disney’s Streaming Profitability Is Wall Street’s Top Concern – Not the Hollywood Writers’ Strike
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Bob Iger came back to Disney promising a steady hand. On Wednesday, it will be Wall Street’s turn to feel the calming touch again.
As the last major streaming player to report earnings, Disney will likely match its peers in promising to stick to plans to turn a profit in its direct-to-consumer business in 2024. And though labor strife and politics will likely take their turn in the conversation, investors will be far more focused on learning whether cost-cutting efforts designed to generate $5.5 billion in annual savings are paying off.
The timing of the quarterly results come as Disney has stepped up its legal fight against Florida Gov. Ron DeSantis, faces investor questions about the future of Hulu and ESPN in its streaming strategy and is now confronting the potential impact from the Writers Guild of America strike, which began last week after the group was unable to reach an agreement in contract negotiations with the Alliance of Motion Picture and Television Producers.
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That’s a lot on Iger’s plate, but he has considerable support among investors from his past run at the House of Mouse. Disney is in a “prime position” despite the company’s various challenges, Gerber Kawasaki Management CEO Ross Gerber said.
“They have great assets, they’ve got great streamers, they’ve had great success and they were mismanaged by [Bob] Chapek who had the worst instincts I’ve ever seen in an entertainment CEO. He just shouldn’t have been there,” Gerber told TheWrap. “Iger is just trying to just fix the damage that was done and get high-quality content back in the system again and cut costs. And Iger will be successful.”
When it comes to Disney’s quarterly results, Gerber said he would focus on profitability and subscriber growth in streaming; the outlook for the parks business, especially as it pertains to China; the company’s expectations and strategy for its theatrical business; and more clarity on plans for ESPN.
“I don’t think we’re gonna hear anything about a plan for Hulu yet,” he said. “I think Hulu is actually a good platform and has legs and has live TV. So it does fit unless somebody is willing to pay a premium for it. I don’t think [Disney] could get the right value for Hulu trying to sell it unless they and Comcast work something else [out].”
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Under a 2019 agreement, Disney can buy out Comcast’s minority stake in Hulu stake as early as January 2024, and Comcast can require that Disney do so. Disney has guaranteed a minimum total equity value of $27.5 billion for Hulu, suggesting that Comcast’s share would be worth at least $9 billion. As of Oct. 1, 2022, Disney valued Comcast’s stake at $8.7 billion.
Iger has said that Disney is looking at Hulu “very, very carefully” and has suggested that all options are on the table, including a potential sale. Comcast has also previously expressed interest in acquiring Disney’s two-thirds stake in Hulu should it go up for sale.
As for ESPN, Gerber will be specifically looking for updates on whether the business will go into sports betting, either by partnering with an app or launching its own. He also wants to know about Disney’s plans for the cable side of the sports network, as linear TV viewing continue to decline.
“I think there’s a lot that they can clarify about ESPN,” he added. “Hulu, I think, is still pretty hard to call what’s gonna happen.” On a recent earnings call, Comcast President Mike Cavanagh brusquely declined to answer a question about Hulu.
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Swinging the ax
Gerber said investors will be curious about one-time charges associated with Disney’s cost cuts, how those cuts will affect the company moving forward and what the long-term benefit might be.
To date, the company has laid off 4,000 of the 7,000 employees announced back in February. Affected divisions have included ABC and Freeform, FiveThirtyEight, Disney+ and Disney Studios and ESPN.
“As long as [Iger] can convince investors that the cost-cutting efforts are going as [Disney] had planned and they’re able to execute well, that provides some cushion,” Bloomberg Intelligence analyst Geetha Ranganathan told TheWrap. “I think it buys him goodwill from Wall Street.”
Headline news risks
Like other major studios, Disney will face questions about the WGA strike and its potential impact, especially with respect to profitability goals for the streaming division.
“I expect some commentary but not much on the WGA strike,” Morningstar analyst Neil Macker told TheWrap. “In terms of impact, I think it depends heavily on the length of the strike. The longer it goes on, the more productions get delayed. Then after the end of a long strike, there will be a pileup of projects trying to get back into production, raising costs across the board and possibly causing further delays.”
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The WGA previously noted in a memo sent to analysts and investors prior to the strike that Disney produced 890 of the 4,450 WGA-covered comedy and drama episodes during the 2021-2022 broadcast season. While an extended strike that leads to fewer new titles and episodes running on Disney+ and Hulu could potentially cause an increase in disappointed viewers canceling streaming subscriptions, one former studio executive previously told TheWrap that studios’ streaming divisions likely won’t see an impact in that regard until the end of 2023 or beginning of 2024.
“I don’t really think it’s a big pain point necessarily for investors,” Ranganathan said. “We’re not really looking at subscriber numbers anymore as kind of driving the stock narrative. So from a stock perspective, I don’t think it’s such a big deal.”
The short-term risk may be more around negative publicity than a fiscal impact. Iger is one of eight CEOs singled out in a recent WGA infographic slamming Hollywood executives’ compensation packages.
Disney’s fight with DeSantis, likewise, represents more of a “headline risk,” Ranganathan said, and less of a financial one.
“I think obviously Disney has the upper hand legally,” she said. “It’s going to be an extended battle.”
Analysts are currently expecting Disney to report earnings of 88 cents per share on revenue of $21.7 billion. Disney shares have climbed over 15% year to date as of Monday’s close, after falling 43.9% in 2022.
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