Disney lost $ 14 billion following a warning to subscribers. Why this is an overreaction.

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Several Wall Street analysts have lowered their subscriber estimates to

Walt disney

The Disney + streaming service in the current quarter on Wednesday, after CEO Bob Chapek warned that subscriber growth would be held back by several negative factors.

The change in the very short-term forecast shouldn’t be material to a Disney stock investor’s thesis, and yet it sold off strongly on Tuesday. On Wednesday, stocks rebounded.

Disney stock (ticker: DIS) went from a gain in early afternoon Tuesday to a close of 4.2%, at $ 171.17. Shares rose about 1.2% on Wednesday, to pass $ 173.

Speaking to

Goldman Sachs

At Communacopia’s annual media and telecommunications conference on Tuesday, Chapek said Disney + and its international equivalents would add “a small million single-digit subscribers” in the current quarter, which is the fourth fiscal year of Disney.

That compares with 12.4 million additions in the fiscal third quarter, and Wall Street analysts were looking for a number primarily in the low and mid teens before Chapek’s remarks, according to FactSet. Disney + had 116 million subscribers worldwide at the end of June.

Tuesday’s sale reveals how sensitive Disney shares are to quarterly streaming subscriber numbers, a dynamic that has led

Netflix

stock (NFLX) for years.

contrary to

Netflix
,

Disney’s global streaming strategy is far from universal. It offers its services in different packages and under different brands in different markets. Disney +, Hulu, and ESPN + are US offerings, while Disney + in Europe and Canada includes an additional channel with content similar to Hulu. The company’s service is called Disney + Hotstar in India and Star + in Latin America, both of which include sports content. Prices also vary considerably depending on the market.

But Disney is far from transparent in how it reports these all-important subscriber numbers. Disney +, Star +, and Disney + Hotstar subscribers are all lumped into one category, despite major differences in their financial implications.

Disney + costs $ 8 per month in the United States, while each Disney + Hotstar subscriber earns around 45 cents in subscription revenue per month. Sports streaming rights could cost Star + and Disney + Hotstar hundreds of millions of dollars a year overseas, while in the United States, Disney + has no sports content, which is on the ESPN + reported. separately.

Chapek said on Tuesday that the deficit in overall Disney + subscribers that Disney reports would come largely from lower-value international versions of the service, while Disney + ‘s core will continue to grow, but investors won’t know by how much. .

A large cohort of Disney + Hotstar subscribers will see their annual subscriptions expire in September. The pandemic suspension of the Indian Premier League cricket season last spring also meant less sporting content over the summer, a major draw for service in India.

And the CEO also said that the launch of Star + in Latin America in recent months has gone slower than expected, another challenge for subscriber growth in the current quarter.

Swiss credit

Douglas Mitchelson got straight to the point in a report released Wednesday: “Disney lost $ 14 billion in market capitalization on Tuesday, almost entirely when CEO Bob Chapek made his company update comment. That’s roughly $ 5 million for every Disney + Hotstar subscriber we’ve taken out of our model, subscribers who see $ 0.45 / month in subscription revenue. “

Mitchelson lowered his fourth quarter revenue forecast by just $ 4 million and $ 16 million for the full year 2022. He made no changes to his earnings per share estimate and maintained its outperformance rating on Disney stocks, with a price target of $ 218.

“Disney’s long-term streaming outlook remains very uncertain and hotly debated, and therefore minor changes in short-term results will continue to have a disproportionate impact on its share price,” added Mitchelson.

The company has a long-term goal of 230 million to 260 million Disney + subscribers by the end of 2024, of which 30-40% would be Disney + Hotstar. Chapek stressed on Tuesday that growth in subscribers to this target will not be linear and investors should expect to see some volatility in the numbers each quarter.

“Given the unpredictable nature of subscriptions and the fact that management generally does not provide guidance on subscriber growth, it is to be expected that Disney + will not always meet consensus expectations every quarter,” JP Morgan analyst Alexia Quadrani wrote on Wednesday. “We remain very encouraged by the growth prospects of Disney + and are not concerned about this modest shortfall compared to expectations.”

Quadrani now expects Disney + to end the current quarter with 119 million subscribers, up from its previous estimate of 125 million. Like Mitchelson, she didn’t change her earnings estimates and maintained her overweight rating, with a price target of $ 220.

Other analysts on Wednesday made similar changes to short-term subscriber estimates, while leaving their earnings forecasts and price targets unchanged.

If Disney had flagged US and European Disney + subscribers separately from Disney + Hotstar and other low-cost international versions of its service that didn’t have as much of a financial impact, Chapek’s warning on Tuesday wouldn’t have come true. interpreted as negatively as it was.

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