The Walt Disney Company's (DIS) streaming service Disney Plus subscriber growth pumped growth for its stock during most of the pandemic. As the company emerges from the pandemic, Disney Plus is driving declines.

In trading on Tuesday morning, Disney's shares fell by roughly 2% from Monday's closing price to reach $174.10. Reports ascribed the decline to Wells Fargo analyst Steven Cahall's cutting of the firm's price target on Disney shares by $13 to $203 due to a "reset" in subscriber estimates at Disney Plus. The House of Mouse's shares ended Wednesday's trading session changing hands at $172.68.

Key Takeaways

  • A Wells Fargo analyst has reduced the price target for Disney's share price.
  • He cited a "reset" to a reduced subscriber count as reason for the price target reduction but says Disney can improve its performance by offering content breadth and depth to attract more subscribers to its service.
  • The analyst's rating for the shares' performance remains intact.

Slowing Subscriber Growth

Cahall's price target revision was instigated by Disney CEO Bob Chapek's recent speech at a Goldman Sachs conference. Chapek that said Disney Plus subscriber growth will be in the "low single-digit millions" this quarter, a figure that is dramatically different from analyst estimates of 17 million new subscribers for the same time period. The latter's estimated figures are a reflection of the service's phenomenal growth in the first year of its existence.

Chapek cited several reasons—from a slower subscription renewal rate in India for Hotstar, the company's South Asia-focused streaming service, to difficulties in finding parties for its recently launched Latin American service—as reasons for the slowdown. 

Wells Fargo's Cahall revised his estimates for Disney Plus net additions to 2 million from the earlier 13.5 million. Disney Plus and Hotstar together will witness a decline of 1.5 million, instead of an earlier estimated addition of 8.5 million, estimated Cahall. He also said that subscriptions for the core Disney Plus platform would go down by 2 million to 3.5 million.

Disney has not changed its overall guidance for 230 million to 260 million new Disney Plus subscribers by 2024. But Cahall revised his subscriber estimates to 236 million from 256 million. He wrote that Chapek's comments have "cast a spotlight on what it will take for Disney to reach fiscal year 2024 guidance." The analyst continued: "After making it look all too easy, Disney now has a bit more work ahead on direct-to-consumer," adding that the company will need to bring in new subscribers from outside the core genres of its content.

Will Content Drive Subscriber Growth? 

Cahall is resting growth prospects for Disney's streaming services on content. As an example, he cited the case of streaming giant Netflix, Inc. (NLFX).

According to his statistics, Netflix's addition of roughly 26 million subscribers on an annual basis between 2017 to 2019 increased its content amortization—an accounting maneuver to spread content costs over multiple quarters—from "about $5 billion in 2016 to more than $9 billion by 2019." According to Cahall, "While the environment was perhaps less crowded for streaming, we think the example shows it can be done. We think content delivery is the best predictor of subscriber acquisition, so the question for Disney is a simple one: will the content do it?"

In some respects, Disney already answered that question at its Investor Day presentation last December. At that event, the company outlined its streaming service plans. It is relying heavily on the reach and diversity of its content to attract new subscribers. Bob Iger, executive chairman, said that the company's investments in production values and talent for its streaming content was on par with its theatrical releases.

"You'll also see that we are redoubling our efforts to create rich, diverse content that best represents the world we live in and the consumers that we're making that content for," Iger said. But the service will have to contend with an increasing list of competitors, all of which are spending heavily on new productions for their services. Unlike rival Netflix, which has shared figures for its ballooning content spend, Disney does not provide investors with numbers for content investments.

"If Disney can ramp up content breadth and depth as it plans to per the December 2020 investor day, then we think fiscal year 2024 guidance is achievable. We see the Disney+ fan event and build of content through calendar year 2022 as the next major set of catalysts," wrote Cahall.