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Earnings Outlook: Disney+ subscriber growth is slowing down, and so is the stock

Walt Disney Co. bounced back last quarter with booming theme-park and movie results that had earnings and sales soaring, superhero-like, from a pandemic-depressed slump.

However, the one Disney
DIS,
+0.82%

offering that helped the entertainment giant withstand the COVID-19 pandemic’s withering effects on its other businesses, the Disney+ streaming service, may be headed the other way. When Disney announces fiscal fourth-quarter results Wednesday, expect a big slowdown in subscriber growth and lots of questions about Disney’s content plans in the growing war for streaming customers.

In September, Chief Executive Bob Chapek cautioned fourth-quarter global paid subscriptions would increase sequentially by “low single digit” millions compared with a rise of 58.5 million in the previous three months, and Disney stock has slipped almost 4% since that announcement as the S&P 500 index
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+0.14%

gained 5%. Disney has tried to change that conversation with plans for Friday’s Disney+ Day, the company’s first companywide promotional event featuring new content across different studios on the platform.

Disney will premiere new movies and television shows for the celebration, but its overall pipeline is still being questioned. Disney boasts one of the richest portfolios of intellectual property, built on the blockbuster franchises of “Star Wars” and the Marvel universe, while rivals Netflix Inc.
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+1.05%
,
Apple Inc.
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-0.46%
,
 and Amazon.com Inc.
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have to invest billions of dollars on original content without the same built-in fan base. Yet analysts are as invested in quantity as they are in quality, and Disney is rolling out new content slowly as it attempts to build back production schedules disrupted by the pandemic.

“We’re seeing some slippage in Disney’s FY22 slate due to production delays and the interconnection of content,” Wells Fargo analyst Steven Cahall said in an Oct. 26 note.

“While the company (Disney) appears to be targeting one new piece of content a week, not every piece of content has the same franchise value or visibility,” Barclays analyst Kannan Venkateshwar said in a biting note in September in which he downgraded Disney shares.

To reach the 230 million to 260 million Disney+ subscribers it projects by the end of fiscal 2024, Disney has to more than double its current pace of growth to at least the same level as Netflix, according to Barclays. Netflix has 213.6 million subscribers as of the quarter ended September; Disney+ has 116 million paying customers as of late June. Analysts polled by FactSet expect that number to increase to 126.2 million through September.

See also: Your streaming subscriptions reshaped Disney and turbocharged Netflix — now comes making more money off you

Disney’s other businesses may continue to show a rebound in Wednesday’s report, especially the movie division, which unfurled four major films during the quarter — “Black Widow,” “Jungle Cruise,” “Free Guy” and “Shang-Chi” — that so far have grossed more than $1.3 billion globally. But Chapek did say in September that the strength of recovering theme park attendance was temporarily hit by Delta concerns that slowed down attendance.

What to expect

Earnings: Analysts on average expect Disney to report earnings of 52 cents a share, compared with a loss of 39 cents a share a year ago. Analysts had been forecasting 68 cents a share at the end of June.

Contributors to Estimize — a crowdsourcing platform that gathers estimates from Wall Street analysts as well as buy-side analysts, fund managers, company executives, academics and others — are projecting earnings of 52 cents a share on average.

Revenue: Analysts on average expect Disney to report $18.8 billion in fourth-quarter revenue. Estimize contributors predict $18.8 billion on average.

FactSet analysts are expecting the following revenue for Disney’s divisions: Disney Media and Entertainment Distribution ($13.4 billion, of which $6.9 billion would come from linear networks and $4.6 billion for direct to consumer); Disney Parks, Experiences and Products ($5.5 billion).

Stock movement: Disney stock has declined in the trading session following seven of its past 11 quarterly earnings reports. Disney shares are down 2% so far this year, while the Dow Jones Industrial Average 
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+0.28%
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 which counts Disney as a component, has gained 17% and the S&P 500 index has climbed 25%.

What else to look for

A big theme for the quarter is what the future content pipeline looks like, and whether Disney will begin to diversify the Disney+ content oering.

Case in point: “Black Panther: Wakanda Forever” was pushed to Nov. 11 from July 8 because of the domino effect of other titles impacting the film. “We think Marvel’s ‘Eternals’ theatrical opening in November [Nov. 5] is tracking well with many IMAXs already sold out, and box oce data is looking better after ‘Dune,’” Wells Fargo analyst Cahall wrote last month. “With the Disney+ Day on Nov. 12, we think the content outlook could improve sentiment.”

Heading into the holiday season, Disney has a “significant amount of content for Q1:22 to try to drive new subscribers to join the Disney+ platform,” Cowen analyst Doug Creutz said in an Oct. 28 note that rated Disney stock as market outperform with a price target of $147.

On Thanksgiving, Disney will premier the Beatles documentary “Get Back,” Marvel’s “Hawkeye,” Star Wars’ “The Mandalorian” spinoff “The Book of Boba Fett,” and National Geographic’s “Welcome Earth” with Will Smith.

“While this content is likely to be appreciated by subscribers who have already signed up as dedicated consumers of kids/Marvel/Star Wars content, it’s less clear that the shows will be enough to drive meaningful new subscriber growth,” Creutz cautioned.

Farther out, the pipeline in December includes Steven Spielberg’s remake of the musical “West Side Story,” the Kingsman prequel “The King’s Man,” and the animated “Encanto.”

Disney has pushed back release dates next year and beyond for “Doctor Strange and the Multiverse of Madness” (to May 6, 2022, from March 25, 2022), “Thor: Love and Thunder” (to July 8, 2022, from May 6, 2022), “The Marvels” (early 2023), “Ant-Man and the Wasp: Quantumania” (to July 28, 2023, from Feb. 17, 2023), and the fifth Indiana Jones installment (to June 2023 from July 2022).

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