Shares of Disney closed at $97.57 Monday, up six percent from the previous trading day, after the surprise announcement that Bob Iger would return to the company as CEO.
The share price reflects the largely positive sentiment on Wall Street to Iger, as investors look to the veteran executive to make a series of decisive actions to help turnaround the company, with a particular eye to Disney’s potential buyout of Comcast’s stake in Hulu. Analysts say this is likely the easiest early action Iger can take, as some caution that the returning CEO may face challenges in undoing several of the changes already enacted by former CEO Bob Chapek.
Monday’s close continues a rally that began in pre-market trade Monday morning, when shares shot up 9 percent. This comes after the stock had hit a 52-week low of $86.28 earlier this month.
Goldman Sachs analysts, who maintained a buy rating and $118 price target, said they expected the stock rally after the Iger announcement due to his successful 15-year tenure. That experience sets him up well for his upcoming two-year reign, but they note that he’ll also encounter some headwinds as he returns.
Iger’s term “coincides with Disney confronting more significant operating challenges as it emerges from COVID, facing intensified secular (accelerating cord-cutting) and cyclical (macro-driven ad weakness) pressures on its linear business,” the Goldman Sachs analysts wrote. And Iger still needs to find a permanent successor, per the board’s mandate.
Importantly, investors expect Iger to re-evaluate Disney’s streaming strategy, in particular the balance of subscriber growth to profitability. While Chapek recently said Disney is on track to reach profitability in the segment by fiscal year 2024, the “uncertain outlook for the long-term profitability of streaming services (for Disney and its peers) is a key overhang on the stock,” Goldman Sachs analysts wrote.
Investors are also looking for a resolution on Disney’s ownership in Hulu. As it stands, Disney has a 67 percent stake in Hulu, while Comcast owns 33 percent. In September, Chapek said Disney would be interested in buying Hulu’s stake before 2024, when it has the right to exercise its call option. This could help firm up Disney’s streaming strategy, the Goldman Sachs analysts write.
The analysts also expect Iger to formulate a plan to move its linear ESPN offerings to a separate streaming platform, as has been hinted on previous Disney earnings call, while adjusting the cost structure of the linear network to better suit a streaming offering, and to give more guidance on whether sports gambling will be a part of the business model.
Bank of America analyst Jessica Reif Ehrlich, who reiterated her buy rating and $115 price target, said Iger’s changes to ESPN “remain uncertain,” in her view, however, she notes that Iger has recently made public comments on the challenges facing linear TV, which “could signal a potential openness to reevaluate strategic alternatives.” The likelier changes Erlich sees are a reversal of Chapek’s decision to restructure Disney’s media and entertainment distribution segment and to raise prices across the organization. “We also would not be surprised if this announcement prompts another wave of management turnover,” the BofA analyst wrote.
Still, J.P. Morgan analysts, who hold an overweight rating and note they’re “reluctant to chase shares” now, argue that many of Chapek’s changes will not be easily untangled from the organization, due to macroeconomic challenges facing the sector, as well as the company’s own financial situation.
While backing the idea that Iger may accelerate Disney’s purchase of Comcast’s stake in Hulu, per the board mandate “to set the strategic direction for renewed growth” at the company, the analysts say they believe “Disney’s current DTC strategy is unlikely to change dramatically.”
The planned price increases across the streaming services, and the launch of the ad-supported tier are already set to launch on Dec. 8, and “Disney needs their incremental revenue,” writes J.P. Morgan analyst Philip Cusick. It’s more likely that Iger cuts 2024 subscription targets on the February earnings call, he said. Further, while the pace could slow, Cusick sees the park price increases sticking around due to the uncertainty of the economy.
And while Chapek’s announcement of cost cuts at the company “may have been the last straw,” as Cusick writes, those cuts will still be necessary.
“Iger could put a stop to all of that until he has reviewed, but cost-cutting [is] still likely to happen,” Cusick wrote.