UPDATED: Did activist investors light a fire under Bob Iger?
Disney shares were up more than 9% in early trading Thursday, to over $108 per share, coming after the Mouse House topped Wall Street earnings expectations for the year-end 2023 quarter (while top-line revenue was slightly below targets). The stock climbed as much as 13.7% during the session before closing up 11.5% to $110.53, boosting Disney’s market cap by more than $21 billion (to nearly $203 billion).
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Perhaps more than the actual quarterly results themselves, which showed improvements in cost containment, investors were responding to a flood of longer-term strategic announcements from Disney. CEO Iger touted the company’s joint venture with Fox and Warner Bros. Discovery to create a sports-centric streaming bundle, targeted for fall 2024 launch, as well as plans to debut a stand-alone streaming version of ESPN as early as August 2025. Iger also announced a $1.5 billion investment in Epic Games and a long-term commercial partnership with the “Fortnite” developer; unveiled a surprise November 2024 premiere date for the animated “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 a detail on the call that in particular caught analysts’ attention: For the first time, Disney stated that its long-term objective is to reach “double-digit” profit margins in its streaming biz, which has been narrowing its losses and execs said is on track to hit profitability by the end of fiscal 2024 (ending in September). That came after Nelson Peltz’s Trian Fund Management, which ostensibly is waging a battle to replace two Disney board members with its own candidates, had called on the media conglomerate to “target and achieve Netflix-like margins” of 15%-20% by fiscal year 2027.
“Our heads are spinning from the newsflow, nearly all positive,” Tim Nollen, senior media tech analyst at Macquarie, wrote in a research note raising his price target on Disney shares from $94 to $104 based on upward revisions on financial estimates. “We believe in the long-term upside, but still question the offset to the linear networks from [direct-to-consumer] advances, and the time it will take to bring about meaningful financial upside — today’s news items are multiyear efforts.”
Peltz’s Trian, meanwhile, wasn’t impressed. “It’s déjà vu all over again. We saw this movie last year and we didn’t like the ending,” the hedge fund’s Restore the Magic account grumbled in a post on X. To be sure, Disney’s shares are still off their 52-week high of $118.18 — and significantly down from the all-time high of more than $189/share in February 2021.
The proxy battle launched by Peltz, whose Trian controls some $3 billion in Disney stock, is unlikely to win shareholder votes at the April 3 annual meeting that will install Peltz and ex-Disney CFO Jay Rasulo on the board. But the real endgame may have been to rattle Iger’s cage so the company would move more quickly on strategic-growth initiatives the hedge fund called out, like establishing timelines for streaming profitability and launching ESPN DTC — and thereby drive up Disney’s stock price. (Meanwhile, a campaign by smaller investment firm Blackwells Capital looks aimed a blunting Peltz’s attack with a trio of more Disney-friendly candidates. Blackwells slammed Peltz for enlisting support from Disney antagonist Elon Musk, who is angry that Disney pulled ad spending from X over Musk’s endorsement of an antisemitic conspiracy theory.)
In a note titled “DIS: EPIC Quarter (Bob’s Version),” Wells Fargo analyst Steven Cahall upped his price target on the stock from $115 to $128/share.
“Disney is officially back on offense with the profit and loss humming and confident guidance,” Cahall wrote. He cited Disney’s “flattish expense growth” for FY24, which reflects Iger’s plan to meet or exceed $7.5 billion in annualized cost savings. “With this done and Sports/Experiences steady, we think [management] attention remains on creative,” 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,” “Moana 2” and “Mufasa” as opportunities.
On the earnings call, Disney CFO Hugh Johnston told analysts that “we feel a sense of urgency” in boosting the profitability of the streaming business. “We still expect to reach profitability at our combined streaming businesses in Q4 of fiscal 2024 and have never been more confident about our path to creating a strong and sustainable streaming business, with growing subscribers over the long term and, ultimately, double-digit operating margins, a business which we fully expect to be a key earnings growth driver for the company,” he said. About the double-digit margins 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 discussed plans to convert Disney+ password-sharing users into revenue-generating subscribers, which will commence this summer — a growth strategy patterned on Netflix’s successful moves in this area.
The comment by CFO Johnston about “a sense of urgency” on streaming profitability was “one of the single most impactful statements on a call filled with key highlights,” MoffettNathanson analysts led by Michael Nathanson wrote in a Feb. 8 research note.
“Given CEO Bob Iger’s honest observation upon his return that ‘we got a little bit maybe intoxicated by our own sub growth,’ the company sounds like they will center their primary communication mission on building the case for Disney to be the No. 2 global streaming player in terms of profitability and scale” after Netflix, Nathanson observed. “With a market cap that is larger than the entirety of Disney, Netflix has been rightly crowned the winner of the streaming wars with what appears to be a winner-take all positioning aka the biggest tech giants. No other company – not even Disney – has made the case yet they have the potential to build a large, profitable business. There appears to be a new urgency to spend more time focused on that opportunity.”
Still, “the timing and path forward still remain pretty ambiguous” for Disney’s streaming profitability targets, Nathanson added. For fiscal 2025, the analyst has projected Disney’s direct-to-consumer streaming division will have a margin of 6% ($1.7 billion) on an earnings-before-interest-and-taxes basis on $26.5 billion of revenue. MoffettNathanson maintained its “buy” rating on Disney shares and increase its price target to $120/share (up $5).
Disney’s news blast this week may also have been designed to deflect attention from the fact that for the last three months of 2023, Disney+ lost a net 1.3 million subscribers in its “core” markets (excluding Disney+ Hotstar). The company attributed the decline to Disney+ price hikes 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,” boosted by its deal with Charter to essentially bundle a complimentary Disney+ subscription with the Spectrum TV Select cable package.
“Disney has not made streaming profitable, but the company is getting close,” Third Bridge analyst Jamie Lumley said. “The question that remains is whether this comes at the expense of subscriber growth, with Disney+ Core subscribers declining by 1.3 million” in the year-end quarter.
Meanwhile, regarding Disney’s joint venture with Warner Bros Discovery and Fox for a sports-centered streaming bundle, Lumley said it represents an opportunity to “bring in a major audience for Disney as it reaches households outside the pay-TV ecosystem while its linear channels continue to see declining viewership” — but at the same time, it’s still unclear how the JV might cannibalize the growth prospects of properties like Hulu + Live TV and the ESPN stand-alone streaming service.
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