For a company that was tagging all-time highs as recently as March, Disney (NYSE: DIS) shares have grown quite soft in recent weeks. We’ve seen a more risk-averse sentiment creep into equities since interest rates started popping last quarter, specifically in relation to tech and growth stocks, but Disney is very much the opposite of those. Still, their shares are down more than 15% in the past two months and have given back quite a bit of their post-pandemic economic reopening-related gains.
They closed last week close to their 2021 lows, after gapping down on Friday’s open. The catalyst for this latest drop was their fiscal Q2 numbers which were released after the previous evening’s bell. Even though EPS was well above what analysts were expecting, revenue was down 13% on the year and a good bit below the consensus. Disney Plus subscriber numbers were also soft, coming in at 103.6 million versus the 109.3 million that had been expected.
Investors and Wall Street seem to have become particularly sensitive to any weakness in their Disney Plus subscriber count, as the streaming wars continue to heat up. Because aside from that miss, it was for all wants and purposes a decent report which bodes well for those of us considering an entry point.
Net income from continuing operations was up 95% on the year, while income from their Disney Media branch was up 74% on the year. While the market has zeroed in on the softness in their new subscriber numbers, management still struck a bullish tone in their letter to shareholders. CEO of Disney, Bob Chapek, said with the release; “we’re pleased to see more encouraging signs of recovery across our businesses, and we remain focused on ramping up our operations while also fueling long-term growth for the Company. This is clearly reflected in the reopening of our theme parks and resorts, increased production at our studios, the continued success of our streaming services, and the expansion of our unrivaled portfolio of multi-year sports rights deals for ESPN and ESPN+.”
It could be the case that momentum from the reopening of Disney’s theme parks, historically their core revenue earners, is starting to wane, particularly with shares up more than 20% from their pre-pandemic levels even with the recent dip. Investors might be getting back down to focus on the longer-term revenue drivers such as their streaming business, which has unlocked a ton of fresh revenue for the business in recent years but is finding itself in an ever more competitive market.
But on this point, there are several sell-side heavyweights that are bullish on Disney’s prospects, in large part due to the potential in the streaming market. Only last week Credit Suisse were reiterating their Outperform rating on Disney shares, based on what they believe are conservative growth expectations for Disney Plus. They also gave them a fresh price target of $218 which from Monday’s closing price suggests there’s upside of some 30% to be had.
Considering The Long Opportunity
In the aftermath of last week’s earnings report, the folks over at Guggenheim trimmed their price target to a degree but maintained their expectations for outperformance in the near and long term. Barclays did the same, as did UBS, but all three still have fresh price targets of well more than $200 a share for Disney which is currently trading around $170.
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