At The Walt Disney Co.’s virtual investor day Thursday, it’s all about streaming.
In 2019 the company announced its pivot to streaming and since then has largely achieved its 2024 goals two year’s early. Now analysts are eager to hear what Disney can to turn subscriber growth into profits.
The analysts want to know how Disney Plus will continue its subscriber growth. They will want to hear about advertising trends at Hulu. They want to know how aggressive Disney will be with moving sports to ESPN Plus. And they want to know Disney’s plan to launch Star, its new international streaming service.
“Back in the day one would try to gain an edge on Disney’s financial outlook by mapping out the impacts of the affiliate renewal cycle, putting together a film-by-film box office build, or even tracking interest rate fluctuations given the impact to pension expenses and Parks' margins,” said Kutgun Maral, analyst at RBC Capital Markets. "Now, the closer you dig the murkier things look as media networks are clearly being de-emphasized to accommodate the streaming pivot, theaters are closed and the slate remains in flux, and domestic Parks operating income has swung from $1 billion in quarterly OI pre-COVID to an average loss of $1.4 billion since spring.”
Ahead of the meeting, analyst Steven Cahall of Wells Fargo, upgraded Disney to overweight because of its success in streaming so far.
“We think Disney is set to complete its transformation into a global streaming content company including the deep Disney brands (Disney Plus), general entertainment (Star, Hulu, Disney 18 Plus) and eventually global sports (ESPN Plus),” Cahall said.
“We expect global subscribers to go from 117 million today to conservatively 250-300 million in about 5 years. Global content spending would be more than $22 billion (excluding sports) with DTC revenue of more than $25 billion,” Cahall said. “This is the sort of long-term story that potentially provides ample subscriber catalysts and foments a Growth-oriented investor base. Chuck the dividend, torch EPS, spend aggressively, All Systems Go on streaming.”
Cahall has a unique opinion that eventually, Disney will consolidate its streaming brands and become the global competitor to Netflix.
Analyst will want to see how many of Disney’s movies will be shoveled into Disney Plus to boost subscriber growth. Disney is unlikely to be as aggressive as AT&T, which is putting its entire 2021 film slate on HBO Max at the same time the movies go to theaters.
Michael Nathanson of MoffettNathanson Research said there is an expectation among investors that Disney could announce taking ESPN over the top during its investor day presentation.
Nathanson has his doubt about that strategy. “ESPN currently doesn’t have all the third party rights to actually do this and still has a few major MVPD renewals to close in the coming year – most notably Comcast, which comes due at the end of 2021,” he said. “Given that there are still 80 million paying homes in a bundle that is driven by live sports, why would Disney risk cannibalizing this revenue stream to find new sports customers residing in the 30 million broadband-only home universe?”
ESPN might add some niche sports, such as the NHL, but he doesn’t think Disney will blow up the pay TV ecosystem. At least not now.
Among the Disney streaming services, Hulu is the only one whose subscriber growth hasn’t outpaced Disney’s expectations.
RBC’s Maral doesn’t think Disney will change its Hulu subscriber targets. “We do expect to hear more about the advertising outlook at Hulu,” he said. “We estimate that Hulu generated $2.8 billion in ad revenue in fiscal 2020 and generated $6.50-$7 in ad revenue per average sub. Going forward, we believe that Hulu will benefit from shifting ad dollars to digital platforms with addressable ad inventories, providing further uplift to ad ARPUs.”
