Disney+ Streaming Costs Dim Analysts’ View on Explosive Growth

(Bloomberg) -- An explosive launch for Walt Disney Co.’s newest video-streaming product had Wall Street raving about the prowess of its entertainment brands, but a costly online-TV strategy remains a cause for concern.

On Wednesday, Needham warned clients that Disney’s “estimates remain too high” for 2020 given its investments behind launch costs and direct-to-consumer programming. The firm cut its profit estimates as Disney cited potential risks to its outlook due to the impact of coronavirus-related closures in China.

Shares in Disney fell as much as 2.2% intraday during early trading Wednesday, compared to a 0.1% increase in the S&P 500 Media & Entertainment index.

Analysts remain generally confident about Disney’s pivot to streaming overall. “We already thought Disney had best in class content, this quarter provided another data point of their ability to use this content to gain scale quickly,” Bernie McTernan, an analyst at Rosenblatt Securities, wrote in a note. The firm increased its price target by $5 to $180 per share, landing just below the Street-high $200.

In its first official look, Disney+ garnered more than 28 million subscribers after launching less than three months ago in the U.S. The swift response among consumers, embracing Disney’s portfolio of nostalgic titles, details how management’s about-face adoption of streaming is faring in a crowded market for streaming services.

Here’s what Wall Street is saying:

MoffettNathanson (Michael Nathanson)

Buy, price target $165

“Regardless of whether you own Disney’s stock, the company and their management team must be given credit for pulling off one of the greatest product launches of all time.”

“The incredible success of Disney+ with 28.6 million paid subscribers in less than 90 days -- almost half of where Netflix is today -- speaks to the unrivaled quality of their content, the strength of their brands and the magic of Disney’s marketing machine.”

“Disney has quickly, albeit expensively, built a collection of scaled OTT assets that should help claw back incremental subscription and advertising revenues to offset declining linear revenues.”

Rosenblatt Securities (Bernie McTernan)

Buy, raises price target by $5 to $180

“Disney remains our top pick in media as we believe they will be able to successfully transition to a DTC streaming model, results this quarter increased our confidence.”

“We are increasing our Disney+ global forecast now expecting 36 million and 48 million subscribers at the end of March and September, respectively, up from 28 million and 39 million.”

“We already thought Disney had best in class content, this quarter provided another data point of their ability to use this content to gain scale quickly.”

Needham (Laura Martin)

Hold rating

Needham projects Disney+ adoption will drive higher Netflix churn. “Our research indicates that U.S. consumers are suffering from SVOD fatigue, and say they are reluctant to add to their current average of three to four SVOD services.”

Subscriber metrics were “the biggest surprise from the call,” wrote Martin in a note, highlighting that the losses/investments Disney “is making to drive this growth is material.”

Needham said Disney’s “estimates remain too high” for the fiscal year 2020 due to direct-to-consumer programming investments and launch costs. Additionally, the firm lowered its earnings per share estimates given Disney’s outlook on the impact of the coronavirus in China.

Bloomberg Intelligence (Geetha Ranganathan)

“While the ramp-up will continue to take a toll on profit, depressing operating income by $900 million in fiscal 2Q, strong growth in the face of intense competition suggests that the bet, though risky, is paying off.”

“The subscriber base will get a boost with overseas launches in March.”

©2020 Bloomberg L.P.

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