Disney's Streaming Surge, Epic Games Deal Among Key Growth Drivers, Says Analyst

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Needham analyst Laura Martin reiterated a Buy rating for Walt Disney Co (NYSE: DIS) with a $110 price target.

The re-rating is based on:

  • Direct to Consumer (DTC) breakeven in fiscal 2024 with "double-digit" margins at maturity.
  • 5.5 million to 6 million new subscribers from Charter Communications, Inc (NASDAQ: CHTR) starting in the second half of fiscal 2024.
  • Disney's $1.5 billion investment in Epic Games (to build Disney video games).
  • 70% of $60 billion Parks CapX will be "incremental capacity" leading to a revenue boost.
  • $8 billion of fiscal 2024 free cash flow, exclusive Taylor Swift concert rights for Disney+.
  • A 50% higher dividend (to $0.90 per year) for a 1% yield.
  • More than $3 billion of share repurchases in 2024.
Longer-term, Martin noted Disney's asset mix of both digital and physical assets (i.e., an Omniverse) maximizes its economic value capture, that Disney benefits from generative AI and the company will be a takeover target by the Big Tech companies backed by its streaming moat and high-quality content libraries with hit film and TV franchises.

Martin lowered her fourth-quarter operating income and EPS estimates. Disney's new fourth-quarter estimates are revenue of $22.2 billion, operating income of $3.6 billion, and adjusted EPS of $1.07.

Martin maintained her Entertainment revenue estimate of $10.6 billion. She cut her estimate for Linear Networks by 10% to $2.4 billion, reflecting continued linear subscriber declines in the quarter and the Disney carriage dispute with DirecTV exactly offset by higher box office revs for "Deadpool & Wolverine" in the Content Sales segment. Martin estimates the operating income for this division to be $665 million.

Martin maintained her estimates for Sports revenues at $3.8 billion but raised her estimated operating income by 11% to $922 million, reflecting momentum and cadence in this division, evidenced in the third quarter. Martin maintained her revenue estimate for Experiences of $8.2 billion but cut her estimate for operating income by 13% to $1.7 billion to reflect the guidance of losses in the "mid-single digits."

DIS Price Actions: Disney stock is up 1.32% at $95.16 at publication Thursday.