Walt Disney Co The (NYSE: DIS) ambitions for Disney + far exceed analysts' expectations. The company is targeting between 60 and 90 million subscriptions for its direct-to-consumer service by 2024, said management during the Investor Day presentation on Thursday.
It also expects the streaming platform to reach profitability by 2024, one year after the release of the expected results by Hulu and ESPN + and two years ahead of schedule by UBS. The timeline has boosted Street's confidence.
"In summary, we consider the high-quality IP of the company, the extensive original content range, an attractive user interface, competitive pricing ($ 6.99 / month for Disney +) and a market strategy ( leveraging all DIS assets) around the world, reinforcing our belief. in the potential for additional value creation via DTC, "wrote Bank of America analysts Merrill Lynch, Jessica Reif Ehrlich and Bryan Goldberg in a note.
Given the value of Disney +, they suspect the management is cautious in its underwriting objectives, and JPMorgan offers conservative profitability forecasts.
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L & # 39; opportunity
Disney announced that it would launch more than 25 original series and 10 films throughout the first year of Disney + and that it would act as the exclusive streamer of the 30 seasons of "The Simpsons".
"The comprehensive content and completeness of key areas such as Pixar and Star Wars have been a positive surprise and the ARPU suggests subscribing upfront, rather than maximizing revenue," writes Steven Cahall, RBC Capital Analyst.
"With a low price of $ 6.99 a month and robust content with a four quadrant call, we expected a sharp initial ramp up of subscribers," writes analysts Alexia Quadrani and David Karnovsky. "By combining this rapid growth with the continued growth of the core underlying business and synergies from the Fox Transaction, we firmly believe that DIS shares are well positioned to outperform in the future. "
They consider that Disney's penetration potential is higher than that of any other streaming service. Between this and its price below expectations, Disney + could well compete with Netflix, Inc. (NASDAQ: NFLX) or Amazon.com, Inc. (NASDAQ: AMZN)
"Disney has also announced that its content will be downloadable without restrictions, competing with the features of Netflix and Amazon Prime Video," wrote Quadrani and Karnovsky. "Disney also introduced the product interface, which resembles that of Netflix with customization of user profiles, recommended content, search capabilities and parental controls."
Shawn Cruz, a trading specialist at TD Ameritrade, believes Netflix's concerns could be exaggerated.
"The only reason I do not consider this a competitive development for Netflix is: does Disney increase its share of the pie, or does it grow?" Cruz told Benzinga. "Disney does not charge an exorbitant amount to decide one or the other.You're going to use Disney service to what you already have.You still have a long way to go where it becomes something that is close to what you pay for the cable. "
Related link: Cowen Upgrades Disney, Bullish On Streaming Service and Movie Pipeline
The costs of greatness
Bank of America has pointed to the "bold" costs needed to obtain value and ultimately reduce its net profit estimates for 2020 and 2021 to allow annual dilution of $ 3.5 to $ 4 billion. RBC Capital expects less than $ 3 billion in 2020, but UBS believes the sacrifices could be even bigger.
"Management has not provided specific guidance on lost license revenue (beyond $ 2.5 billion for Disney +) but we believe that comments suggest a longer content license than we had previously modeled, "wrote UBS analysts John Hodulik and Batya Levi.
Nonetheless, RBC Capital said the earnings per share slowdown seemed better than expected, and Bank of America was pleased with the costs, noting that the DTC opportunity created a floor for earnings per share.
Uncertainties remain over synergies of operations, the next CEO, Hulu's path to full ownership and Hulu's international launch plans, but analysts remain largely optimistic.
- Bank of America Merrill Lynch maintained a purchase price with a price target of $ 144;
- JPMorgan maintained its overweight position and raised its target from $ 125 to $ 137;
- RBC Capital maintained a prime rating with a target of $ 140; and
- UBS maintained its purchase price with a target of $ 128.
At the time of publication, Friday afternoon, Disney shares rose 9.5% to $ 17.80 per share.
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