Disney is undergoing a ‘drastic evolution’ in streaming, and more changes could be afoot

“The debut earnings call of Bob Iger’s second tour made it clear that Iger will lead Disney out of its streaming landgrab phase and into a period of greater efficiency,” wrote Wolfe Research analyst Peter Supino, who has an outperform rating on the stock and boosted his price target to $133 from $117. “Disney will reduce spending on personnel, DTC [direct-to-consumer] promotions, advertising, and general entertainment programming.”

Disney shares were up about 7% in premarket trading Thursday.

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RBC Capital Markets analyst Kutgun Maral used strong words in describing Disney’s new approach to its business.

Management is undertaking a “drastic evolution of the company’s DTC vision (shifts across the programming focus, global footprint, and pricing),” he wrote, and the sum total of Disney’s reorganization efforts can bring “profound operational and financial implications,” in his view.

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Structural changes to the organizational scheme hold promise, he wrote, as Disney plans to give creative leaders more say over what content gets made and how it’s marketed.

“While the significance of this move may not be fully appreciated from the outside, it ultimately marks a profound shift in the accountability of how content performs financially across the company, and is aimed to have a more cost-effective, coordinated and streamlined structure,” Maral wrote. He had an outperform rating and $130 target price on the stock.

Needham’s Laura Martin broke down that trend as well: “DIS’s prior CEO got fired in part, we believe, because streaming losses totaled $1.5B last quarter because content creators had no profit accountability,” she said.

The report contained “everything the bulls wanted,” in the view of Wells Fargo analyst Steven Cahall.

“Disney+ will be less promotional and go for better ARPUs and margins, which could include exiting some geos where streaming isn’t particularly profitable,” he noted. “Licensing will return where it makes sense, and DIS will cross-distribute some content between streaming and traditional.”

Cahall noted that despite the cost cuts, Disney reiterated a target for direct-to-consumer profitability by the end of fiscal 2024. Some investors were questioning why Disney doesn’t expect to reach that goal more quickly, Cahall said, but in his view, “break-even profit was never going to be easy, so now it’s de-risked vs improved.”

He rated the stock at overweight and upped his price target to $141 from $125.

SVB MoffettNathanson analyst Michael Nathanson keyed in on the potential geographic shifts that Disney might make down the road.

“Without explicitly saying the words ‘India’ and ‘Hotstar,’ it certainly felt Disney was intimating when acknowledging the challenges of investing in original content in low-RPU markets,” he wrote, referring to revenue per user. “As we have noted, the increasing competition from the new Reliance/Viacom18/Bodhi Tree entity for cricket rights and the slowdown in Hotstar subscribers creates a new worry about the long-term profitability of Disney’s Star assets in India.”

He maintained an outperform rating on the stock while raising his target price to $130 from $120.

Analysts also saw some clues in the report that Disney might have some bigger changes up its sleeve in the future.

“Iger’s decision to eliminate DTC subscriber guidance and isolate ESPN as a reporting segment maximizes the company’s flexibility in negotiating a Hulu transaction, pursuing alternatives for ESPN, and allocating programming assets to pay-TV/linear, DTC, and third party distribution,” wrote Wolfe’s Supino.

Needham’s Martin, who has a hold rating on the stock, pondered whether Disney will go on to sell a 10% to 15% interest in ESPN.

KeyBanc Capital Markets analyst Brandon Nispel, meanwhile, showed a bit of caution in thinking about the stock’s big boost in the extended session.

“Even following a 45-minute callback with DIS’s CFO, we left with more questions than we started; ultimately, we would not be surprised to see the stock fade tomorrow, as the big picture questions remain unanswered,” he wrote. “However, we’re fairly confident Disney’s Media future profitability will be greater in three years than it ever was, and feel Parks value is underappreciated.”

Nispel had an overweight rating on the stock and increased his target price to $130 from $119.