Walt Disney Co. is about to face “perhaps its biggest decision yet” as it charts a future for ESPN, and the path forward initially may be a rocky one, according to an analyst.
Macquarie’s Tim Nollen downgraded Disney shares
DIS,
to neutral from outperform Friday, writing that Disney faces a tricky balance as it tries to set up ESPN for the new reality of media. The downgrade comes after The Wall Street Journal reported a day earlier that Disney was “actively preparing” for a future in which it would offer the flagship ESPN service as a stand-alone streaming service.
“Doing so is inevitable, and it’s hard to see how it will be smooth: steep losses assumed in the pay TV bundle will have to be offset by strong subscriber sign-ups at a presumed high price, and before Disney even gets there it has to negotiate terms with pay TV operators on content, and with the leagues on costs for streaming rights,” Nollen wrote.
Disney already offers the ESPN+ streaming service, but that doesn’t include access to the flagship programming that airs through the traditional cable channel.
Nollen expects that Disney ultimately succeeds with the transition of core ESPN to streaming, though it might require at least a year or two of pain in the interim.
He has concerns about other factors that could weigh on Disney shares as well. For one, the company is making progress in stemming operating losses for its streaming business, but he thinks that “prior guidance of DTC [direct-to-consumer] attaining profitability during FY’24 may now be off the table.”
See also: Disney scraps plans on roughly $1 billion investment at new corporate campus in Florida
Nollen flagged that Disney now looks more likely to buy out Comcast Corp.’s one-third stake in Hulu to take full ownership of the service. That development, which is expected to take place early next year, “along with a slower pace of sub adds (Disney+ may actually lose subs for the 3rd straight quarter in [the fiscal third quarter]) may factor in to extended DTC operating losses beyond [fiscal 2024],” Nollen wrote.
He further noted that growth for Disney’s parks business “is set to slow from here, removing a recent support.”
Disney shares are off more than 2% in afternoon trading Friday.
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