Stocks Of Disney Are Downgraded With Subscriber Forecasts Looking Risky

In the midst of a challenging media landscape, Walt Disney Co. faces obstacles that have led one analyst to express concerns about the stock's potential for advancement in the near term. 

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Wolfe Research analyst Peter Supino downgraded Disney shares from outperform to peer perform on Friday, citing several factors such as risky Disney+ subscriber forecasts, a deteriorating outlook for linear TV, consensus on $2.5 billion in hard cost reductions, and the expectation that content amortization will catch up with cash spend in the coming years.

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This downgrade follows Disney's earnings report on Wednesday, which revealed a decline in Disney+ streaming subscribers and a more prudent approach to streaming spending. Disney intends to reduce its content production going forward and aims to incorporate Hulu content into the Disney+ platform for consumers who choose to subscribe to both services, a strategy the company believes will appeal to subscribers and advertisers alike.

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Supino expresses doubts about Disney's ability to meet expectations for accelerated Disney+ subscriber growth in the September quarter. He notes that while content has reached a "steady state" in the second half of 2022, Disney management continues to pin hopes for subscriber growth on the timing of content releases.

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Furthermore, Supino raises concerns about Disney's capacity to generate gross subscriber additions as it reduces promotional spending. He also highlights the impact of another price increase this year on net additions for the ad-supported tier, despite guidance for an acceleration in subscriber net adds.

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The economic backdrop is another factor contributing to Supino's apprehension. He points to the late-cycle consumer environment and declining growth in direct-to-consumer and linear revenue as reasons for increased forecasting risk and potential time decay.

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While Disney has teased the addition of Hulu content to Disney+ later this year, Supino questions the timing of this move and why management would reveal it before completing negotiations with Comcast regarding its one-third stake in Hulu, which Disney has the option to buy out as early as January 2024.

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Following a decline of 8.7% in Thursday's session, Disney shares remained relatively unchanged in Friday morning trading.

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