Original Article By Tony Maglio At IndieWire.com:
The Walt Disney Corporation doesn’t report fiscal Q1 earnings until February 8, but investors, analysts, and reporters (like yours truly) might want to start mentally preparing now.
Equity analysts at Wells Fargo expect recently reinstated Disney CEO Bob Iger “will come out swinging” in an “action packed” conference call scheduled for 4:30 p.m. ET that day. Actual financials for the October-to-December 2022 quarter will beat out the webcast by about 30 minutes.
No one quite knows the power of magic like Iger, who first steered Disney from 2005-2020. He’s back to make a splash (mountain), and to undo some of his predecessor/successor Bob Chapek’s perceived mistakes — especially as they pertain to streaming.
Chapek went all-in on streaming — perhaps a little too all-in. Early on in his brief (and troubled) tenure atop the New York Stock Exchange-traded company, Chapek released overconfident subscriber guidance for Disney’s streaming business, earmarking 230 million-260 million Disney+ subscribers by 2024 — the same year Disney+ was supposed to become profitable. The former target is likely to be walked back, Wells Fargo wrote in a Tuesday note to its investors.
Disney+ ended September with just over 164 million subscribers and streaming growth at all costs proved to be… costly. While Disney+ added slightly more than 12 million subs in Q4 2022, the direct-to-consumer business lost a whopping $1.5 billion. By contrast, Iger’s bottom line will be the bottom line.
Another problem that Iger would like to nip in the bud is the face of Nelson Peltz. The Trian Management CEO has desperately been trying to join the Walt Disney Corporation’s board of directors since last summer. He had Chapek’s ear; according to current Disney management, he no relevant knowledge or good ideas.
Disney recommends that shareholders vote against appointing Peltz to the board, saying the activist investor “lacks a basic understanding of our industry by his own admission,” and that despite months of talks, Trian hadn’t “actually presented a single strategic idea for Disney” and is “oblivious” to bigger picture changes in media.
Proxy fight!
With such a “battle looming,” Wells Fargo wrote that Disney management’s “best avenue to defend against activism is a higher stock price.” Shares of Disney stock (DIS) are currently trading for $106; Wells Fargo’s price target for Disney is $125 per share with an overall equity value of $228 billion.
The quickest path to a higher stock price is lowering costs, which means scrapping Chapek’s ambitious goals. Moves likely to be reversed include Chapek’s DMED (Disney Media & Entertainment Division) restructure, which removed power from creatives, as well as his staunch stance against spinning ESPN off from Disney. (Iger is more open to it than Chapek was, and Wells Fargo believes it is both the right move and an inevitable one.)
For starters, Wells Fargo believes Disney will announce an “aggressive” cost-reduction program for its streaming business, seeking cuts of about $2 billion or so. In anticipation, the bank is trimming its own Disney+ core subscriber estimates (not including Hotstar) for fiscal-year 2024 from between 135 million-165 million to 126 million. If this all plays out, it believes Disney+ will be profitable on an OIBDA (Operating Income Before Depreciation and Amortization — so, not net income) basis in Disney’s fiscal third quarter of 2024, which ends June 30, 2024.
“Over time, we expect [Disney’s] streaming efforts to converge into a single bundled service, creating a global duopoly” with Netflix, Wells Fargo wrote on Tuesday. Netflix reported quarterly earnings last week; it ended 2022 with about 231 million paid global streaming subscribers, including a few million from its new ad-supported plan.
By 2025, Cahall foresees total Disney+ (including Hotstar), Hulu, and ESPN+ combining for 365 million subscribers. Even Chapek would do the Hot Dog Dance over that estimate: Disney+, ESPN+, and Hulu combined for about 235 million subs at the end of September, months before the launch of the Disney+ ad-supported tier.
