Walt Disney (NYSE:DIS) reports its fiscal third-quarter earnings in about a month — and the discussion heading into the newest print seems to be centered on whether the company has lost a bit of its content mojo.
That talk comes up whether talking about less content for streaming service Disney+, or what looks like weaker performance for some formerly reliable subject matter (Recent Pixar films like Lightyear and Elemental have underperformed, and the newest Indiana Jones movie opened to a much lower total than its franchise predecessor).
Those and other concerns have led Wells Fargo to cut its expectations heading into earnings. Analyst Steven Cahall reduced earnings per share forecasts for the quarter to $0.98 (well below consensus for $1.07) and for the full year by 6%, to $3.82 (below consensus for $3.90).
He also cuts EPS expectations for fiscal 2024 to $5.55 from $5.71, and for 2025 to $6.1 from $7.09.
The company will need to show more visibility into future earnings growth at direct-to-consumer, he said. He expects Disney+ will show 300,000 net sub additions — all of those international, with no domestic growth.
“DIS has suggested F3Q will be softer for sub additions with less content, and then rebound in F4Q,” he said. “Investors are worried DIS is losing its content excellence.”
Average revenue per user, though, should rise 19% to $7.44 thanks to the recent price increase, he noted, and Disney+ is still “quite underpriced.”
Meanwhile, ad woes are hitting the linear TV business thanks to entertainment ratings and weakness in the scatter market, along with one less NBA Finals game, he said. And accelerated depreciation of the company’s Star Wars hotel is hitting the Parks business, which also faces unfavorable comparisons and wage growth.
He’s still a Buy (thanks to under-earnings at DTC), and looking ahead to the next meaningful catalyst for the bull case in September, though.
“We don’t expect F3Q23 to solve debates, but rather tee up deeper convos for the September investor event, including presentations on all DIS operating segments and how [management] will solve the earnings problems,” he said. “DTC profitability is the biggest issue, followed by ESPN going into streaming.”
He has a target price of $147, implying 64% upside. Disney was up 0.9% at midday Friday.