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Disney's new digital strategy draws cautious analyst response

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Disney's new digital strategy draws cautious analyst response

Analysts largely viewed Walt Disney Co.'s plan to move more heavily into over-the-top content as a good long-term strategy; however, several expressed concerns about the company's near-term financials, particularly at its media networks segment.

In post-earnings research notes, most agreed that news of Disney's $1.58 billion investment in BAMTech and related OTT launch plans overshadowed a "mixed-to-negative" fiscal third-quarter earnings release. Opinions were more varied as to exactly how the new digital platforms would impact future earnings. Investors also took note, bidding Disney shares down about 4% on Aug. 9, the first trading day after the earnings report and OTT announcements.

"There is now a lack of visibility" into Disney's profitability, BMO Capital Markets analyst Daniel Salmon said in an Aug. 9 note, adding that depressed operating income could last "well into the next decade" as the company invests in its new services. However, "these are the right [long-term] moves," Salmon concluded. Still, he reduced his price target on Disney shares to $90 from $95 and reiterated an "under-perform" rating on the company, citing ESPN's weak earnings results and the increased margin pressure from the direct-to-consumer strategy.

Brian Wieser of Pivotal Research Group questioned in an Aug. 9 note whether Disney's new streaming platforms could garner enough subscribers to not only capture consumers leaving the cable bundle, but also an outsized share of cord-cutter and cord-never consumers. Disney will need to "establish a sufficiently differentiated product without harming relationships with incumbent distributors and business partners" and "do this in a manner that is at least as profitable as exiting business models," he said.

Disney CEO Bob Iger assured investors on the company's Aug. 8 earnings call that the digital strategy would ramp to become more lucrative than its existing business models, but Wieser argued achieving that will require some finesse. The analyst raised concerns about cannibalization to existing services, as "Disney's offerings appear to mostly target customers who are already paying (usually indirectly – from MVPDs for ESPN (US) and Netflix Inc. for Disney studio content)." Wieser said Disney could potentially offset this by driving subscribers with new, exclusive original content. He maintained a "sell" rating on Disney shares and $85 price target.

Evercore ISI analyst Vijay Jayant was more bullish, arguing in an Aug. 8 note that the digital strategic turn could "ultimately yield large returns," albeit after some short-term disruption.

Before the announcements, Jayant and his team expected improving growth trends in the coming quarters, driven by Disney's increasing participation in virtual bundles and forthcoming carriage-agreement renewals. The company's new digital strategy brings "a new element of uncertainty because of the incremental investment they may require," he said. Iger on the earnings call acknowledged the potential for increased expenses related to the service launches and the development of new original content.

That said, Disney "is now on a path to controlling its own destiny and will have the optionality to pivot further into the digital realm," Jayant said, reiterating his "outperform" rating on Disney shares and $120 price target.

FBR Capital Markets analyst Barton Crockett said in an Aug. 9 note that Disney's strategy "seems destined to further accelerate the inevitable consumer transition to a patchwork of discrete online services — and away form the traditional bundle that is so richly lucrative for DIS." He echoed concerns that for Disney to grow, it must make up in digital subscribers what it loses from the traditional bundle. However, despite the risk, Crockett concluded that such a move is necessary for Disney to compete with Netflix, Amazon.com Inc., Alphabet Inc. and other companies competing in the premium direct-to-consumer content arena. Crockett maintained a "market perform" rating on Disney but trimmed his price target to $112 from $114.

Shares of Disney closed Aug. 9 at $102.83, down 4.15% for the day on heavier-than-average volume.