Earnings Preview: Is Disney+ in for a wake-up call like Netflix?

Is The Walt Disney Co. On Track For Subscriber Loss Like Its Biggest Streaming Rival?

disney dis,
brutally eaten into rival Netflix Inc.’s NFLX,
Subscriber base has grown to 129.8 million subscribers since Disney+ launched in November 2019. That’s more than half of Netflix’s total of 219.6 million, which fell by 200,000 subscribers in the first quarter, sending Netflix shares sharply lower and raising questions about the environment for streaming services.

Analysts believe something similar, albeit to a lesser extent, could happen for Disney.

“The March quarter is expected to be weak due to limited new content launches and launches in Disney+ net additions,” Wells Fargo analyst Steven Cahall said in a statement last week. He expects 3.5 million net additions, while analysts are forecasting an average of 5.27 million, according to FactSet.

A perfect storm of factors — inflation, an explosion of streaming services, the war in Ukraine, and subscriber fatigue among them — have conspired to silence streaming subscriptions as belt-tightening consumers hop from service to service jump, according to Deloitte. [Some 89 million streaming subscriptions were added in the U.S. in 2021, and another 77 million are forecast in 2022, according to the Convergence Research Group.]

Disney appears to be best positioned among the major players, which also include Apple Inc. AAPL,
Warner Bros. Discovery Inc. WBD,
and Inc. AMZN,
because of its content (Pixar, Marvel, “Star Wars”) and its continued appeal to younger viewers and parents, according to Tricia Biggio, chief executive of entertainment technology company Invisible Universe.

“Netflix established the market, yes, but it was Disney who was late to the party and is now the party,” Biggio told MarketWatch. “In an industry that increasingly relies on content and [intellectual property] If consumers are more sophisticated about their money, then Disney clearly has the upper hand.”

Other advantages Disney has over Netflix include a robust sports menu with ESPN+ as part of its streaming package with Hulu, and plans for an ad-supported version of Disney+ in the US later this year.

Conversely, Disney spends $11 billion on streaming content, a huge chunk of its $26 billion total TV and film production budget. Netflix is ​​spending $18 billion on content this year.

Streaming is just part of a media empire whose portfolio includes amusement parks, hotels, cruise lines, and consumer goods.

FactSet analysts expect healthy sequential revenue declines for Disney Media and Entertainment Distribution ($13.75 billion) and Disney Parks, Experiences and Products ($6.3 billion). Both segments are likely to be the weakest quarters of the fiscal year for the Magic Kingdom.

Somewhere in between is embattled chief executive Bob Chapek, who fell out with his predecessor, Bob Iger, before a series of controversies further eroded his leadership. A delayed response to Florida’s so-called “Don’t Say Gay” law, an escalating standoff with Florida Gov. Ron DeSantis, a messy corporate reorganization — plus a since-settled lawsuit from “Black Widow” star Scarlett Johansson — have all added up multiple headaches for Chapek, whose contract expires in February 2023.

What to expect

Merits: Analysts polled by FactSet, on average, expect Disney to report earnings of $1.19 per share in the second quarter, up from 50 cents a share a year ago. At the end of January, analysts had expected $1.25 per share.

Contributors to Estimize — a crowdsourcing platform that collects estimates from Wall Street and buy-side analysts, fund managers, company executives, academics, and others — forecast earnings averaging $1.19 per share.

Revenue: Analysts, on average, expect Disney to report revenue of $20.05 billion in the second quarter, up from $15.6 billion a year ago. Estimate contributors forecast $20.05 billion on average.

Stock movement: As of Monday’s close, Disney stock is down 31% so far this year, while the S&P 500 Index SPX,
is reduced by 16%. Disney’s shares are down 27% since the company last reported its quarterly earnings.

What Analysts Say

Analysts are generally concerned about streaming but are divided on the Parks business as talk of inflation and a possible recession mounts.

“Disney’s share price appears to be falling daily as concerns mount for both [direct-to-consumer] and recession for parks,” Wells Fargo’s Steven Cahall said in an April 27 note. “We think sentiment is overdone in both cases. While recession fears may prove temporary — and we expect solid Parks results — DTC is quite a Show Me story.

Morgan Stanley’s Benjamin Swinburne is optimistic about a rise in the Parks segment and reiterated an overweight position in Disney stock with a price target of $170 in a statement last month. However, streaming remains a “show-me story,” he warned. Earnings Preview: Is Disney+ in for a wake-up call like Netflix?

Brian Lowry

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