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Walt Disney made a splash on Tuesday when it revealed that its new streaming service Disney+ signed up 28.6 million subscribers in less than three months since its launch last November. It was a strong start to Disney’s next chapter as a streaming competitor to the likes of Netflix and Amazon.com.
At the end of 2019, Disney+ had 26.5 million subscribers—almost halfway to the bottom end of Disney’s (ticker: DIS) fiscal 2024 target of 60 to 90 million users. The company’s other streaming services, Hulu and ESPN+, also showed surprising growth. The disclosures came as part of Disney’ fiscal first quarter 2020 earnings report.
Analysts on Wednesday were impressed with Disney’s early success with Disney+, as well as solid results at its theme parks and from its movie studios. Its TV networks segment was the weakest part of the portfolio last quarter.
“Regardless of whether you own Disney’s stock, the company and their management team must be given credit for pulling off one of the greatest product launches of all time,” wrote MoffettNathanson analyst Michael Nathanson, who rates Disney Buy with a target price of $165. “The incredible success of Disney+ with 28.6 million paid subscribers (mostly domestic) in less than 90 days—almost half of where Netflix is today—speaks to the unrivaled quality of their content, the strength of their brands and the magic of Disney’s marketing machine.”
J.P. Morgan’s Alexia Quadrani raised her price target on Disney stock by $10, to $170 a share. That is about 20% above its level of $141.11 on Wednesday morning, down 2.5%.
“We continue to believe DIS shares stand out as a unique play within media with unmatched content and a winning distribution strategy,” wrote Quadrani, who also reiterated her Overweight rating on Wednesday. “We look for ongoing positive data points on the Disney+ expansions, as well as a return to overall earnings growth next year…”
Although Disney’s direct-to-consumer segment is still a fraction of the size of its traditional TV, movie, and theme parks businesses, it is at the core of many investors’ and analysts’ reasoning about the outlook for Disney stock. So many saw good news there on Tuesday as good news for the whole company.
“We applaud Disney’s strategy and focus on developing direct-to-consumer streaming services with quality and scale—this is all that really matters here, in our view,” wrote Macquarie Capital analyst Tim Nollen on Wednesday morning. “Progress on subs and pricing implies profitability could come much sooner than the initial five-year plan suggests, though in the near term Disney faces costs to get there, disruption in its traditional TV businesses, and factors beyond its control in China.”
Nollen rates Disney stock at Outperform, with a $160 price target.
Still, expectations for Disney+’s debut were high. Last April, Disney set aggressive long-term targets for investment and subscribers on its three streaming services. After Disney+ was launched on Nov. 12, the company said that it garnered 10 million sign-ups on just its first day. Both events caused sharp spikes up in Disney’s stock, which has outperformed its media peers and the broader market over the past year.
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“Based on buy-side feedback coming into the quarter, we believed Disney+ subs less than 25 million would drive stock down, greater than 30 million would drive stock up,” wrote Bernstein analyst Todd Juenger. “26.5 million is squarely in the ‘fairly priced’ comfort zone…We believed DIS stock was more-or-less fairly priced coming in, and we continue to believe that coming out.”
That could explain Disney stock’s decline on Wednesday morning. Immediately after the report on Tuesday evening, shares had been up about 2% in after-hours trading.
Juenger also noted that the 28.6 million update suggested that the pace of Disney+ subscriber growth has meaningfully slowed. “Excluding the first 10 million subs in the first 24 hours, Disney+ was adding, on average, 350,000 subs/day during FQ4. That pace has slowed to 64,000 subs/day in FQ1-to-date,” wrote Juenger, who has a Market-Perform rating and $141 price target on Disney stock.
Disney management said on Tuesday that it expects the next big batch of Disney+ subscribers to come in late 2020, when season two of The Mandalorian and a couple of new series from the Marvel franchise debut on the service. It will also launch in Western Europe and India this March, and in more countries by the end of the year. Hulu will also be launched internationally in 2021.
Wall Street analysts are bullish on Disney stock: Seventy-four percent have a Buy or equivalent rating, while 26% recommend a Hold. No analysts rate Disney at Sell. Their average target price is $160.96, about 14% above its recent $141.11. Disney stock pays a 1.2% annual dividend yield.
Write to Nicholas Jasinski at nicholas.jasinski@barrons.com