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UPDATED: Did activist investors light a low fire Bob Iger?
disney Shares rose more than 9% in early trading Thursday, to more than $108 per share, after Mouse House beat Wall Street earnings expectations for the year-end quarter of 2023 (while top line were slightly below targets). The stock rose as much as 13.7% during the session before closing up 11.5% at $110.53, boosting Disney’s market capitalization by more than $21 billion (to nearly $203 billion of dollars).
Perhaps more than the quarterly results themselves, which showed improvements in cost containment, investors were responding to a flurry of long-term strategic announcements from Disney. CEO Iger promoted the company joint venture with Fox and Warner Bros. Discovery to create sports-focused streaming packagescheduled for release in fall 2024, as well as plans to introduce a standalone streaming version of ESPN starting August 2025. Iger also announced a Investment of 1.5 billion dollars in Epic Games and a long-term business partnership with developer “Fortnite”; revealed a surprise November 2024 release date for animated film “Moana 2”; and revealed an exclusive deal for Taylor Swift’s Eras Tour concert film for Disney+ (complete with five bonus songs).
And there was one detail in the call that especially caught the attention of analysts: for the first time, Disney stated that its long-term goal is to achieve “double-digit” profit margins in its streaming business, which has been reducing its losses. and executives said it is on track to reach profitability by the end of fiscal 2024 (which ends in September). This came after Nelson Peltz’s Trian Fund Management, which is apparently waging a battle to replace two members of Disney’s board of directors with his own candidates, he had asked media conglomerate will “target and achieve Netflix-like margins” of 15% to 20% by fiscal 2027.
“Our heads are spinning from the flow of news, almost all of it positive,” Tim Nollen, senior media technology analyst at Macquarie, wrote in a research note raising his price target on Disney shares from $94 to $104. based on upward revisions to financial estimates. “We believe in the long-term benefit, but we still question the trade-off of linear networks for [direct-to-consumer] progress and the time it will take to achieve a significant financial benefit – today’s news is a multi-year effort.”
Meanwhile, Peltz’s Trian was unimpressed. “It’s déjà vu all over again. We saw this movie last year and didn’t like the ending,” the hedge fund’s Restore the Magic account complained loudly. mail at
He is unlikely to win the proxy battle launched by Peltz, whose Trian controls about $3 billion in Disney stock. Shareholder votes at April 3 annual meeting that will install Peltz and former Disney CFO Jay Rasulo on the board. But the true end of the game could have been to rattle Iger’s cage to get the company to move more quickly on the strategic growth initiatives the hedge fund proposed, such as setting timelines for streaming profitability and launching ESPN DTC, and thus raising the price of the Disney stock. (Meanwhile, a campaign by smaller investment firm Blackwells Capital appears aimed at mitigate Peltz attack with a trio of more Disney-friendly candidates. Blackwells criticized Peltz to get the support of Disney’s antagonist, Elon Muskwho is angry that Disney pulled advertising spending from X over Musk’s endorsement of an anti-Semitic conspiracy theory).
In a note titled “DIS: EPIC Quarter (Bob’s Version),” Wells Fargo analyst Steven Cahall raised his price target on the stock from $115 to $128 per share.
“Disney is officially back on the offensive with the P&L buzz and confident guidance,” Cahall wrote. He cited Disney’s “flat expense growth” for FY24, which reflects Iger’s plan to meet or exceed $7.5 billion in annualized cost savings. “Once this is done and with Sports/Experiences stable, we believe that [management] The focus remains on creativity,” according to Cahall. “The last thing investors want to see to solidify support is content hits,” he said, citing projects slated for the second of 2024, including “Deadpool 3.” “Moaña 2” and “Mufasa” as opportunities.
On the earnings call, Disney Chief Financial Officer Hugh Johnston told analysts that “we feel a sense of urgency” in driving profitability in the streaming business. “We still expect to achieve profitability in our combined streaming businesses in the fourth quarter of fiscal 2024 and have never been more confident in our path to creating a strong and sustainable streaming business, with long-term growing subscribers and ultimately instance, two-digit operations. margins, a business that we expect to be a key earnings growth driver for the company,” he said. Of the double-digit margin target, Johnston said: “In some ways, it probably shouldn’t be a surprise to investors because the goal has always been to build what I would characterize as a good business.”
Johnston also spoke about plans to convert Disney+ users who share passwords into revenue-generating subscriberswhich will begin this summer, a growth strategy based on Netflix’s successful moves in this area.
CFO Johnston’s comment about “a sense of urgency” in streaming profitability was “one of the most impactful statements on a call packed with key highlights,” MoffettNathanson analysts led by Michael Nathanson wrote in a research note. on February 8.
“Given CEO Bob Iger’s honest observation upon his return that ‘maybe we got a little drunk on our own undergrowth,’ it looks like the company will focus its primary communications mission on building the case for Disney to be No. 2 globally. streaming player in terms of profitability and scale” after Netflix, Nathanson noted. “With a market capitalization that is greater than that of Disney as a whole, Netflix has rightly been crowned the winner of the streaming wars with what appears to be winner-take-all positioning, aka like the biggest technology giants. No other company – not even Disney – has made this argument, but they have the potential to build a large, profitable business. “There seems to be a new urgency to spend more time on that opportunity.”
Still, “the timing and path forward remain fairly ambiguous” for Disney’s streaming profitability goals, Nathanson added. For fiscal 2025, the analyst has projected that Disney’s direct-to-consumer streaming division will have a 6% margin ($1.7 billion) on an earnings before interest and taxes basis on $26.5 billion in revenue. MoffettNathanson maintained his “buy” rating on Disney stock and increased his price target to $120 per share (up from $5).
This week’s explosion of Disney news may also have been designed to divert attention from the fact that during the last three months of 2023, Disney+ lost 1.3 million net subscribers in its “core” markets (excluding Disney+ Hotstar). The company attributed the drop to the Disney+ price increases it enacted in the quarter. For the quarter ending in March, Disney projected adding between 5.5 million and 6 million subscribers to “Disney+ Core,” driven by its agreement with Charter. essentially combining a free Disney+ subscription with the Spectrum TV Select cable package.
“Disney hasn’t made streaming profitable, but the company is getting close,” said Third Bridge analyst Jamie Lumley. “The question that remains is whether this comes at the expense of subscriber growth, as Disney+ Core subscribers declined by 1.3 million” in the year-end quarter.
Meanwhile, regarding Disney’s joint venture with Warner Bros. Discovery and Fox for a sports-focused streaming package, Lumley said it represents an opportunity to “attract a significant audience for Disney as it reaches homes outside the Disney ecosystem.” pay television while its linear channels continue. see declining viewership,” but at the same time, it’s still unclear how the joint venture could cannibalize the growth prospects of properties like Hulu + Live TV and independent streaming service ESPN.
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