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Is the Walt Disney Co. headed for a subscriber miss, like its biggest streaming rival?
Disney
DIS,
has ferociously eaten into rival Netflix Inc.’s
NFLX,
subscriber base since launching Disney+ in November 2019, climbing to 129.8 million subscribers. That is more than half of Netflix’s total of 219.6 million, which declined by 200,000 subscribers during the first quarter, sending Netflix shares down hard and creating questions about the environment for streaming services.
Analysts believe something similar, though to a lesser degree, could happen for Disney.
“The March quarter is expected to be light on Disney+ net adds due to limited new content + market launches,” Wells Fargo analyst Steven Cahall said in a note last week. He expects 3.5 million net additions, while analysts on average are projecting 5.27 million, according to FactSet.
A perfect storm of factors — inflation, an explosion of streaming services, the war in Ukraine and subscriber fatigue among them — have conspired to muzzle streaming subscriptions as belt-tightening consumers jump from service to service, according to Deloitte. [Some 89 million streaming subscriptions were added in the U.S. in 2021, and another 77 million are forecast in 2022, according to the Convergence Research Group.]
Disney has appeared best-positioned among the major players, which also include Apple Inc.
AAPL,
Warner Bros. Discovery Inc.
WBD,
and Amazon.com Inc.
AMZN,
because of its content (Pixar, Marvel, “Star Wars”) and its enduring appeal among younger viewers and parents, according to Tricia Biggio, chief executive of entertainment-technology company Invisible Universe.
“Netflix established the market, yes, but it was Disney who came late to the party and is now the party,” Biggio told MarketWatch. “In an industry increasingly reliant on content and [intellectual property] when consumers are more discerning with their dollars, Disney clearly has the upper hand.”
Other advantages for Disney over Netflix include a robust sports menu with ESPN+, as part of its streaming bundle with Hulu, and plans for an ad-supported version of Disney+ in the U.S. later this year.
Conversely, Disney is spending $11 billion on streaming content, a huge chunk of its $26 billion overall budget for TV and film production. Netflix is spending $18 billion on content this year.
Streaming is but one piece of a media empire whose portfolio includes amusement parks, hotels, cruise lines and consumer products.
FactSet analysts expect healthy sequential dips in revenue for Disney Media and Entertainment Distribution ($13.75 billion) and Disney Parks, Experiences and Products ($6.3 billion). Both segments are likely to be the weakest quarters of the fiscal year for the Magic Kingdom.
Somewhere caught in the middle is embattled Chief Executive Bob Chapek, who had a falling-out with predecessor Bob Iger before a series of controversies further undermined his leadership. A belated response to Florida’s so-called “Don’t Say Gay” bill, an escalating conflict with Florida Gov. Ron DeSantis, a messy corporate restructuring — as well as a since-settled lawsuit from “Black Widow” star Scarlett Johansson — have all added up to numerous headaches for Chapek, whose contract expires in February 2023.
What to expect
Earnings: Analysts surveyed by FactSet on average expect Disney to report second-quarter earnings of $1.19 a share, up from 50 cents a share a year ago. At the end of January, analysts had predicted $1.25 a share.
Contributors to Estimize — a crowdsourcing platform that gathers estimates from Wall Street analysts as well as buy-side analysts, fund managers, company executives, academics and others — are projecting earnings of $1.25 a share on average.
Revenue: Analysts on average expect Disney to report $20.05 billion in second-quarter revenue, up from $15.6 billion a year ago. Estimize contributors predict $20.39 billion on average.
Stock movement: As of Monday’s trading close, Disney’s stock has sunk 31% so far this year, while the S&P 500 index
SPX,
is off 16%. Shares of Disney are down 27% since the company last announced quarterly results.
What analysts are saying
Analysts are generally concerned about streaming but split on the Parks business, as talk about inflation and a possible recession picks up.
“Disney’s share price seems to fall daily as fears mount on both [direct-to-consumer] and recession for Parks,” Steven Cahall of Wells Fargo said in a note April 27. “We think sentiment on both is overdone. While recessionary fears may prove more temporary —and we expect solid Parks results —DTC is a proper Show Me story.”
Morgan Stanley’s Benjamin Swinburne is bullish about a surge in the Parks segment, and reiterated an overweight rating on Disney’s stock with a price target of $170 in a note last month. However, streaming remains a “show-me story,” he cautioned.
