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The Ratings Game: Disney is faring better than Netflix, but how much does that matter?

Shares of Walt Disney Co. were dropping in Thursday morning trading after the media giant easily topped expectations with its latest Disney+ subscriber numbers but hinted that the recent strength may limit growth upside later in the year.

The company had 137.7 million Disney+ subscribers in total at the end of its fiscal second quarter, above the FactSet consensus, which was for 135.1 million. Chief Financial Officer Christine McCarthy shared on Disney’s

earnings call that the company “still expect[s] higher net adds in the second half of the year versus the first half,” though she added that “it’s worth mentioning that we did have a stronger-than-expected first half of the year.”

See more: Disney stock turns to a loss after warning about rough road ahead for streaming

Cowen & Co. analyst Doug Creutz wrote that though Disney’s growth was “at least” better than Netflix Inc.’s
he got the sense from Disney’s commentary that the outperformance shown in the first half of the fiscal year “didn’t translate to more optimistic expectations” for the second half.

“We think DTC [direct-to-consumer] growth was better than feared in the wake of the Netflix report, but likely not so strong as to convince skeptics (including us) that the company is comfortably on track for its FY24 sub/profitability guidance, which management reiterated,” he wrote in a note to clients, while maintaining a market-perform rating and $132 price target.

Unlike Disney, Netflix shed subscribers in its most recent quarter.

Opinion: Everybody seems scared about where streaming is headed, but calm down and see the benefits.

Disney’s stock fell 0.8% in morning trading, but pared an earlier loss of as much as 5.5%. The stock was still on track to close at a two-year low.

MoffettNathanson’s Michael Nathanson also weighed in on Disney’s long-term subscriber targets, wondering whether Disney made the correct strategic move in opting to pursue aggressive subscriber growth after sporting impressive early results during the pandemic.

“Having tasted success, the company decided to aim higher and integrate general entertainment content and sports into the service to tap into a new set of users aside from Disney superfans and families,” he wrote.

“Would Disney be better off from an ROI [return on investment] path not chasing Netflix down the local content and general entertainment path by creating a super service? Rather, does it make more financial sense to use the Disney/Marvel/Pixar/Lucasfilm brands, libraries and IP to deliver a more targeted service to a smaller (but meaningful) number of higher RPU-paying core fans?”

— MoffettNathanson analyst Michael Nathanson

While Nathanson acknowledged that Disney shares have “moved into a much more attractive valuation zone” recently based on free-cash-flow multiples, he added that he has “limited conviction in [his] out year estimates at this point,” and also flagged macroeconomic concerns about the company.

“[A]s Disney’s economically sensitive engines in the U.S. are firing on all cylinders, there is now the macro environment of rising inflation and lagging consumer confidence to worry about,” he wrote. “Given the limited free cash flow in the near term, the looming buyback of Hulu and the high costs of competing in DTC, the market is spooked that Disney’s domestic parks business and their strength in domestic advertising – core engines of growth – are not sustainable.”

He kept a neutral rating on the stock and lowered his price target to $125 from $130.

Rosenblatt Securities analyst Barton Crockett was more upbeat, writing that “Disney and its media peers are clearly growing streaming better than Netflix,” even though Netflix’s recent struggles may suggest to some investors that the total addressable market for streaming is smaller than previously thought. Additionally, he noted that there’s some concern in the market that Disney’s “post-COVID parks peak may prove unsustainable.”

Crockett added that he doesn’t “share the skittishness” since he sees “several lifts still to come” for Disney.

“Parks still haven’t gotten the 20% of high-spending visitation back that comes from abroad, or the cruise ships. Movies are ramping really strongly for Disney, which could be a $2 billion plus increment to segment profit, based on past performance. And Disney DTC growth is at the top of streaming now. A recession would hit the parks. But with the shares down 30% YTD, that might already be priced in.”

— Rosenblatt Securities analyst Barton Crockett

Crockett has a buy rating on Disney’s stock but cut his price target to $174 from $177.

Shares of Disney have fallen 30.2% over the past three months as the Dow Jones Industrial Average

has declined 8.4%.

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