Wall Street seems to have “largely written off any optimism” about Walt Disney Co.’s streaming business, but such a view is misguided, according to one analyst.
SVB MoffettNathanson’s Michael Nathanson said Tuesday that while Disney’s
DIS,
“stock price, weak subscriber data, and the recent inconsistent management comments about their streaming strategy” have sparked caution, the company’s bundling strategy could yield nice results.
“Given our historical doubts about these streaming business models, we completely understand” why investors have soured on the streaming opportunity, Nathanson wrote in a note to clients. “Yet, we think there is a much better opportunity here than meets the eye.”
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A bundle including programming from Hulu, Disney+ and ESPN+ “will deliver enough premium content to reduce churn, aggregate engagement, and generate substantial non-programming cost savings,” in Nathanson’s view. He added that Disney is already meaningfully below the industry when it comes to churn, or the portion of subscribers who leave a service.
His analysis of company commentary and third-party data suggests it’s “clear that the stability over the past year in subscribers has come from additional bundled subscriber growth of the three-service bundle (D+, Hulu, and ESPN+) and more modestly two-service bundle (D+ and Hulu) helping offset the decline in standalone services, especially since the price hikes at the end of last year.”
Nathanson had been worried that linear distributors would punish companies that put premium spots into their streaming services, but so far consequences have been light, he noted. That means that Disney could perhaps “create more stickiness and audience flow integrating ESPN into Hulu and Disney+ than trying to build a [stand-alone] premium service,” he reasoned.
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Disney reportedly is thinking more seriously about turning its flagship ESPN into a stand-alone streaming product, but Nathanson says a “a sports-only streaming app is a tough model.”
He rates the stock at outperform but cut his price target to $120 from $127 Tuesday, in part due to expectations for a higher tax rate.
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