Wall Street applauded late last year when Walt Disney Co. (DIS 2.32%) quickly signed up 10 million subscribers for its new Disney+ streaming service. Tuesday's encore presentation brought a standing ovation.
Disney's announcement that it had more than 26 million subscribers at year-end and CEO Bob Iger's announcement on the earnings call that it was now up to 28 million led sell-side analysts to praise the streaming service and predict even higher earnings to come for the House of Mouse.
“After two and half months in the US and a handful of international markets, Disney+ is run-rating at nearly $2 billion in revenue and should surpass the $2.8 billion exit-rate we estimated at FYE20,” wrote Morgan Stanley analyst Benjamin Swinburne. “While admittedly early, this reinforces our view EPS can approximately double from FY20 to FY24.”
The Disney Analysts
Morgan Stanley's Swinburne kept an Overweight rating on Disney with a $170 price target.
Rosenblatt's Bernie McTernan reiterated a Buy rating and raised the target price from $175 to $180.
UBS analyst John Hodulik has a Buy rating and $162 price target on the stock and raised his fiscal 2020 EPS estimate from $5.36 to $5.50.
Bank of America's Jessica Reif Ehrlich reiterated a Buy rating and $168 price target.
Needham's Laura Martin has a Hold rating on the stock.
Tigress Financial's Ivan Feinseth continues to recommend a Buy.
The Disney Theses
The earnings and revenue news for the company as a whole was an afterthought in most of the Street's reaction to the print, even as Disney came in above expectations on overall revenue and with a sturdy beat on earnings per share expectations.
It was all about the transition to streaming and how quickly Disney was able to ramp up its bid to compete with Netflix Inc. (NFLX 0.18%) and what's suddenly become a crowded field of companies wanting to beam content into homes through the internet for a monthly fee.
“Breaking the internet,” said Ehrlich of Disney's first few months of streaming. “We believe shares are positioned to outperform.”
McTernan already believed Disney had best-in-class content, but is now proving it can build a streaming service. As a result, he's now assuming 48 million subscribers by year-end 2020, up from a prior projection of 39 million.
Disney also ended the quarter with 30.4 million Hulu subscribers and 6.6 million ESPN+ subscribers, both gains year-over-year, noted Feinseth.
“It proves the company has a solid strategy to build a competitive streaming video product which can challenge its rivals, including the incumbent Netflix,” said Haris Anwar, analyst at financial markets platform Investing.com.
While impressed, Hodulik noted Disney management doesn't expect the sign-up rate to be so robust through the whole year. However, when new content comes on in the fall, he expects strong growth to resume.
2 Cautionary Notes
Needham's Hold rating was based on Disney's projection that its streaming initiatives will break even in 2024, suggesting the spending to build it out will lower EPS for the next several years, Martin said.
“Further, we assume that past is prologue and that DIS will trade as a multiple of its EPS, which has not been true since April of 2019, when DIS shared its Disney+ streaming plans at an analyst day,” she added. “If DIS no longer trades on its P/E, we will be wrong.”
Another down note: the China coronavirus outbreak could be a problem for Disney's parks. McTernan estimated a more than $530 million impact of the virus on the March and June quarters and backed about a dime out of his 2020 EPS estimate.
“Risk is likely to the downside if the virus continues to spread or tourism takes longer to return to prior levels,” McTernan said. “In addition, our model does not contemplate an impact in the US.”
Some of the downside for parks could be offset, however, said Feinseth, by the new attraction “Star Wars: Rise of the Resistance” at both Disneyland in California and Disney World in Florida.
DIS Price Action
Disney shares were down 2.38% on Wednesday, trading at $141.28.