Wells Fargo cuts Disney estimates but stays bullish on lower expectations

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Wells Fargo is resetting its expectations for Walt Disney (NYSE:DIS) with some “necessary” cuts to financial and subscriber estimates, but sees some catalysts for the company to clear a “more reasonable” bar.

The company has “seen the wheels come of the stock wagon” in 2022, analyst Steven Cahall noted: It’s down 34% year-to-date, vs. the broader market’s decline of 17% (see chart here).

A lot of that devaluation came in streaming, though Cahall doesn’t discount recession worries and even the mild drama around whether CEO Bob Chapek had board confidence. But there are catalysts for a rally against lower expectations now, he said.

On streaming first, he’s cut back subscriber expectations for both core Disney+ services and Hotstar, reducing estimated 2024 Disney+ subs to 213M from a previous 240M. (Core is “what really matters” and there he’s going to 140M at the end of 2024, the low end of guidance.)

Hitting the new estimates means adding an average of 5M subs per quarter, similar to recent growth at Paramount+ and HBO Max – and “We remain bullish at this new estimate level because: (1) we think expectations are even lower; and (2) Disney+ will look very different in 24 months given content amort is set to double to $9.4B.”

He’s also trimming estimates in Parks on the slowing economy, though: Taking 2023 per capita spending and hotel revenue per available room down 6% before a 2024 recovery. He’s cut operating income expectations for Parks by 12% in 2023, to $8.6B (vs. $9.1B consensus), and proactively cuts ad sales.

For Q3, he sees adjusted earnings per share of $0.92 (vs. consensus for $1.00) and for full 2023 and 2024, $5.16 and $5.95 respectively, down from $5.81 and $6.59.

Meanwhile, with ESPN+ having just raised its price to $9.99 per month from $6.99, the service could go fully “a la carte any day.”

“We see a big catalyst ahead and think management will too: launch ESPN+ with all sports rights at an (average revenue per user) that makes a DTC sub just as profitable as linear,” Cahall said.

That magic ARPU is about $25 per month, he says, based on the $15/month linear affiliate fee with a 20% linear operating margin.

Disney (DIS) is set to report earnings after the close on Aug. 10; consensus expectations are for $1.00 per share in earnings on revenues of $21B.

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