Walt Disney’s Streaming Services Losing Some Magic, Prompting Notable Analyst Downgrade
3:00 pm Monday, October 18th, 2021
Dow component Walt Disney (NYSE:DIS) is in need of a fairytale ending to turn its gloomy day around after Barclays analyst Kannan Venkateshwar downgraded the stock to Equal Weight from Overweight while cutting the price target to $175 from $210. At the core of Venkateshwar’s downgrade is concern regarding slowing subscriber growth for Disney+, the company’s streaming shining star that has launched its Direct-to-Consumer (DTC) business. The rampant success of Disney+ and the accompanying digital transformation was the primary instigator behind the strong performance of DIS’s stock, which ran higher by 130% from mid-March 2020 to early March of this year. As the tables have turned, mounting concerns that this potent growth engine has lost steam has recently weighed on shares.
Decelerating subscription growth is something that investors have anticipated, even before DIS CEO Bob Chapek warned about that likelihood on September 21 at a Goldman Sachs conference. Recall that he estimated that Q4 global paid subscriptions would increase by a low single-digit millions figure versus Q3. That translates into a sequential growth rate of around 2-4%, compared to 9% growth in Q3. What Venkateshwar’s call illuminates, though, is that DIS is becoming increasingly at risk of missing its long-term streaming subscription targets.
By the end of FY24, DIS has set an objective of reaching 230-260 mln Disney+ subscribers. At the end of Q3 (ending July 3, 2021), subscriptions for Disney+ totaled 116.0 mln, meaning that the company must add an average of at least 8-9 mln subscribers per quarter going forward to meet the low end of its target.
Based on Chapek’s subscription guidance for Q4, it’s clear that DIS has its work cut out for itself. DIS isn’t alone in its struggles, though. Competitor Netflix (NFLX) reported a 430,000 decline in subscribers in Q3, listing rising vaccination rates and the lifting of government restrictions as key headwinds. The disappointing results from NFLX added credence to the idea that demand was significantly pulled forward into 2020. As an aside, NFLX is set to report earnings after the bell tomorrow afternoon.
Compounding the problem for DIS has been the rocky rollout of Disney Star+ in Latin America. During the aforementioned Goldman Sachs conference, Chapek noted that DIS was experiencing some partner-related setbacks in Latin America.
