Disney Stock Sells Off As Wall Street Processes Streaming Cooldown – Update

On an overall upbeat day on Wall Street, Disney stock dropped 3% in the early going as investors processed the company's checkered quarterly earnings report.
He reiterated his "overweight" (buy) rating and a price target of $210. As to the quarterly financials, Swinburne pointed to operating margins of about 16% — double his estimate — and said free cash flow in fiscal 2021 "is going to be stronger than initially expected."” />
Trading volume was three times the stock's normal level. Broader stock markets showed solid gains, with the Dow back in sight of record territory, as relaxed Covid-19 restrictions and improved employment data fueled bullish sentiment.
While none expressed any panic, many sounded some cautionary notes. Several analysts issued updated reports to clients based on the earnings.
"We are hopeful that some of that froth will be taken out of the stock as investors process slowing Disney+ subscriber growth amidst the outsized impact that very low RPU Disney + Hotstar has had on the past twelve months of growth," Nathanson wrote. Nathanson reiterated his "neutral" rating on Disney shares and left his $175 price target unchanged. After months of frenzied buying of Disney stock prompted by strong gains by Disney+ and a ramp-up in production plans, a cool down would not be unwelcome, the analyst said.
"We will be keeping our eyes focused on 'Core' subs," he wrote. He estimated that the company, not counting Disney+ Hotstar, will need to add 5 million new subscribers each quarter for the next 14 quarters in order to reach its goal. Todd Juenger of Bernstein Research doesn't share their confidence, writing a note to clients whose title called attention to "nail-biting time" at Disney.
Disney CEO Bob Chapek and CFO Christine McCarthy mentioned multiple times during a conference call with analysts that they believe Disney+ will reach its 2024 target of 230 million to 260 million global subscribers.
After the closing bell Thursday, the media giant reported results for its fiscal second quarter, which ended April 3. While diluted earnings per share of 50 cents nearly doubled from the year-ago quarter thanks mainly to lower production costs, revenue slid 13% and missed Wall Street forecasts. Even more unsettling to some analysts was the slowdown in growth at Disney+, which hit 103.6 million subscribers but missed analysts' expectations for at least 109 million.
The stellar profit reported by Disney in the quarter, which came in at almost twice the consensus estimate of analysts, would have sent the stock rocking in a different era, Nathanson observed. Yet, the slight miss on Disney+ subscribers this quarter and the more cautious outlook on second half subscriber growth is the headline." "In particular," he added, "the growth in domestic park operations should warm bullish hearts.
Shares have closed north of $176 since February 3 and hit an intraday high of $203.02 on March 8. Shares hovered around $172 and over the initial hour of the session they fell as much as 5% on the day, briefly dipping below $169.
As the economy gradually recovers and moviegoing and sports return to normal levels, he wrote, "all of Disney's related businesses should recover quickly and contribute to significant earnings growth." Ben Swinburne of Morgan Stanley sees the market setting unrealistic expectations for Disney, which has been disproportionately hurt by Covid-19.
Shares made up ground in the final part of the trading day after starting the session down as much as 5%. But Wall Street did not take a shine to the numbers for the quarter ending in April, which showed strong profit but a double-digit slide in revenue and streaming growth below expectations.
Michael Nathanson of MoffettNathanson also took note of India and said almost half of the subscribers added to Disney+ in the past year have come via Disney+ Hotstar. Disney+ ARPU fell to $3.99 in the quarter, a fraction of what Netflix or new rivals like HBO Max have attracted. The significance of that shows up in average revenue per user (ARPU), a widely tracked metric.
He mentioned the outlook from Disney management for a slowdown in subscribers in the second half of the year due to the suspension of a widely watched cricket league in India due to Covid-19 outbreaks. "Pacing concerns will likely be the primary investor takeaway" from earnings, Morris wrote. Michael Morris of Guggenheim reiterated his "buy" rating on Disney shares, but lowered his 12-month price target to $210 from $225. India is a key region for Disney's streaming efforts because of Disney+ Hotstar, a combined product rolled out last year.
Disney shares fell almost 3% to close at $173.73, their lowest closing price since February 1, a day after it released mixed quarterly earnings. UPDATED with closing price.

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