Wells Fargo analyst Steven Cahall cut his stock price target on the Walt Disney Co. by more than $30 on Tuesday but stuck to his “overweight” rating, predicting that investor focus would over time shift from near-term challenges to longer-term upside.
His commentary comes at a time when analysts have been intensely debating the outlook for Disney amid various challenges, from cord-cutting and streaming losses to advertising market clouds, and questions about the company’s future business mix.
“To us, Disney is the most interesting stock in media: an IP powerhouse down on its luck, at a COVID price and historically low multiple,” he wrote. Presenting deep dives into the investor bull and bear cases, he averaged the two scenarios for a new stock price target of $110, down from $146 previously.
Summarizing bears’ arguments, Cahall mentioned the conglomerate’s recent lack of big content successes. “Disney is not a hit factory of late, and content improvement takes a lot of time. Disney’s box office and Disney+ subs will suffer, especially amidst price increases,” he explained investors’ worries. “This creates further downside to direct-to-consumer (DTC) estimates with our bear case below Street on subs and DTC operating income.
Other elements of the bear case include that “Disney doesn’t spend as much on content as investors think: $10 billion, excluding sports/participations” and the concern that ESPN will not transition well to streaming, “creating a long-term earnings per share hole,” the Wells Fargo expert highlighted. A final worry has to do with CEO Bob Iger’s recent mention that the Hollywood giant could sell linear TV networks, excluding ESPN. Cahall summarized it this way: “Disney won’t be able to successfully divest non-core linear.”
In contrast, the bull case for Disney focuses on its “remarkable IP library” with strong appeal to kids and families, which make up roughly two-thirds of core Disney+ subs, Cahall highlighted. In addition, the streamer is “now about price/margins, not sub growth.” And he argued that “Disney+ is massively under-priced versus Netflix on dollar per month average revenue per user (ARPU) per billion dollar content value, including Disney library, so we’re bullish on price hikes.”
Other causes for optimism are the “exceptional” Disney Parks, Experiences and Products (DPEP) business, the planned sale of linear TV assets, and a predicted DTC break-even by the third quarter of fiscal year 2024 along with what Cahall estimates to be $1 billion in Hulu cost synergies after Comcast puts its 33 percent stake in the streamer to Disney.
He even sees an opportunity in the recent heated headlines about Disney’s carriage dispute with cable giant Charter Communications. “ESPN = not operating income driver + Charter dispute speeds change,” Cahall expressed his take in equation form.
His math: “There are arguably around 60 million-plus sports fan households based on viewership across major sporting events.” When ESPN had about 100 million subs in 2015, he estimated non-sports fan subs of around 40 million, “so ESPN’s affiliate fee was revenue-maximizing but under-pricing sports fans,” Cahall explained. “Now, non-sports fans are less then 20 percent of [pay TV] subs, so it makes far more sense for Disney to launch DTC and price discriminate to the more price-inelastic sports fan.”
The analyst expects an early fiscal year 2025 ESPN streaming launch and “trough ESPN EBITDA of around $1 billion in fiscal years 2024-2026, down from about $4 billion in fiscal year 2021.”
Another one of his key arguments is that the “Charter dispute not as material for Disney as bears think.” Explained Cahall: “While we don’t disagree with Charter’s assessment that the pay TV ecosystem is broken with bundles and fee structures that aren’t consumer friendly, we’re also not convinced this is a pivotal moment for Disney. For one, if there’s a persistent Charter blackout or perpetuity drop of Disney content, then subs will likely re-appear on other TV services including Disney’s streaming services, Hulu Live TV, YouTube TV, etc. Given the availability and choice in content services today — and their ubiquity — it does not stand to reason that a drop by Charter’s means viewers will remain unsubscribed, and especially sports fans during football season.”
Additionally, he suggested that Disney likely accounts for “a bigger part of viewership than Charter has indicated.”
Overall, the Wells Fargo analyst is taking a longer-term view on Disney. “Taking the best from each argument [bull and bear], we think the short term is more risky due to DTC subs churn on price hikes, Charter headlines, getting Hulu done and macro for parks,” Cahall concluded. “Approaching calendar year 2024, we think the longer-term DTC earnings/margins story begins to emerge as the key reason to own Disney in duration.”
He also shared why he is sticking to recommending Disney’s stock with his “overweight” rating, explaining: “We think the bad news is mostly baked in.”
