Disney has had a rough year, and now analysts are casting doubt on the media giant’s streaming service due to increasing signs of an economic slowdown.
Wells Fargo analyst Steven Cahall wrote a note to clients Monday in which he acknowledged that the “wheels have come off” of Disney’s stock. As the Dow Jones Industrial Average has dropped 12% this year, the Disney component of it has plunged 34%.
Cahall said regardless of this disaster, he remained bullish on the stock ahead of several key upcoming events.
Cahall went on, “We remain Disney bulls and think upcoming catalysts include Disney+ net adds progressing ahead of investor expectations, as well as potentially launching ESPN+ fully à la carte. If we’re right, direct to consumer within Disney has meaningful upside given where Netflix is trading (and Netflix feels less bad after 2Q22).”
Disney’s fall so far this year has put it alongside Nike, as both stocks hold the position of the two worst performers on the Dow in 2022 so far.
Cahall noted, “Most of that devaluation has been streaming, though recession fears and CEO headlines haven’t helped.”
Cahall made note that Disney’s new CEO Bob Chapek caught flak earlier this year when he refused to openly join in the chorus attacking Florida’s “Don’t Say Gay” bill. The company later relented, and promised to help repeal the bill. However the controversy set off an employee revolt, and caused a pullback in the stock price.
Cahall maintains that now that the controversies are behind the company, one should look to Disney’s future business potential, as the stock is trading at some of the cheapest valuation multiples seen in years.
Cahall explained, “We still think a lot more content equals a lot more subs, and that will drive stock upside as investors have broadly written off DIS’s ability to generate more streaming hits. We think Disney’s hold-back on ESPN+ fully à la carte has been not disrupting the linear apple cart.”
He went on, “We see a big catalyst ahead and think management will too: launch ESPN+ with all sports rights at an average revenue per user (ARPU) that makes a direct to consumer subscriber just as profitable as linear. We think that magic ARPU is ~$25/month based on a ~$15/month linear affiliate fee with a 20% linear operating income margin. We think such a launch would bring in cord cutters/nevers, not cannibalize earnings and keep the peace with MVPDs. We can’t say when, but we’re confident this could happen.”
