Disney (NYSE:DIS)
Following a downgrade of the company to Neutral at Macquarie, which sees certain present clouds bearing some longer-term weight, Disney stock (NYSE:DIS) has down by 1.8% in early Friday trading.
“We continue to prefer Disney for the long run because of its [intellectual property], worldwide brand awareness, and what we think to be its potential to properly convert into a successful [direct-to-consumer] streaming company. However, the immediate future is fraught with various unknowns, according to analyst Tim Nollen.
One thing to note is that the business of linear television is still a significant contributor to Disney’s bottom line (30% of revenue and 50% of operating income in 2023, according to estimates by Nollen), but “linear networks are getting worse, fast” and “ad revenues will likely remain negative in F3Q, and affiliate revenue may remain negative for good as cord cutting gathers speed.”
Streaming is making headway, as seen by a reduction in losses; nonetheless, “we believe prior guidance of DTC attaining profitability during FY’24 may now be off the table,” added Nollen. Factors that could extend DTC operating losses beyond FY’24 include the likelihood that Disney will now buy out Comcast (CMCSA) to take full ownership of Hulu for $9B-plus and the slower pace of subscriber additions (Disney+ may actually lose subscribers for the third consecutive quarter in F3Q).
And the question is not whether ESPN will rise to the top but when and how it will do it. Doing so is unavoidable, and seeing how things will go off without a hitch is difficult.
Disney’s second main segment, Parks, has been steadily improving since the COVID-19 outbreak, which has strengthened the company. However, “growth is set to slow from here, removing a recent support,” as Nollen put it, and a recession “could yet swing this business negatively.”
The profits per share anticipated for 2023 have been reduced to $4.01 from $4.21, and those for 2024 have been reduced to $5.16 from $5.69. This reduces the target price of Disney stock from $125 to $103, bringing the implied upside down to 12%.
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