There are too many structural and macro headwinds at The Walt Disney Company (NYSE:DIS) to support its previous rating, Macquarie Research told investors Friday.
As a result, analysts at the firm downgraded the stock accordingly.
This is the second time Disney has been downgraded by any analyst firm since July 2022, according to Benzinga’s analyst page. Here’s what investors need to know.
Macquarie Research’s Tim Nolan downgraded Disney from an outperform rating to a neutral rating, and cut the price target from $125 to $103.
Nolan’s shift in perspective comes amidst near-term uncertainties that the analyst believes could affect earnings, valuation, and market sentiment.
Nolan highlighted a few crucial factors driving the change in rating, telling investors in a Friday note that Disney’s linear networks are rapidly deteriorating, while their Direct-to-Consumer (DTC) strategy is still a work in progress.
Particularly, the much-debated future of ESPN in the streaming landscape looms large.
Disney’s subsidiaries include ABC, Twentieth Century Entertainment, Marvel, and Lucas Films. The company currently 67% of the streaming service, Hulu, but bought Comcast’s remaining 33% as the sale is currently pending and will be finalized in 2024.
Nolan also noted that growth in Disney’s Parks segment is slowing, bolstered by the fact that the company announced Thursday that it is scrapping plans to build a $1 billion office complex in the sunshine state amid its feud with Florida Republican Governor Ron DeSantis.
Nolan emphasized that Friday’s downgrade doesn’t reflect on Disney’s long-term potential, however, telling investors, “We still appreciate Disney’s ability to successfully transform to a DTC-first streaming business over time, but now see more interim uncertainties.”
The declining health of Disney’s linear TV networks is a key concern. They’re responsible for about 30% of revenue and 50% of operating income, according to FY23 estimates.
“The linear TV networks business… is undergoing further accelerated decline in both revenue and earnings,” Nolan wrote. “Linear decline pushes Disney to do more in streaming.”
Disney’s move to an ESPN OTT service offering is another source of near-term uncertainty, Nolan said, citing short-term disruptions.
Expect possible increases in costs to obtain streaming rights and the uncertainty of how many subscribers the service would attract, he explained.
“We see too many structural and macro headwinds extending beyond the quarter to support an Outperform rating,” the analyst told investors.
Previous Disney CEO Bob Chapek was ousted from his position as the board of directors cited negative earnings for the company. Current CEO Bob Iger claimed he was told by former colleagues that Chapek had pulled away budgetary power from Disney’s creative executive, according a report from CNBC.
Iger was reinstated as CEO in order to re-establish The Walt Disney in a positive light as Chapek’s reputation was seen as toxic for the company.
Disney has scrapped its plans to move the company headquarters to Orlando, Florida as the state lost out on a $1 billion investment that would have moved 2,000 jobs to the area. Iger questioned the investment in the state of Florida.
Produced in association with Benzinga