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Why Are Investors Downgrading Disney Stock?

Photo by Mika Baumeister on Unsplash

Why Are Investors Downgrading Disney Stock?

By Movieguide® Staff

As a vaccination for the COVID-19 virus becomes more of a possibility each day, stock market analysts face a decision: What is the best investment after a vaccine is given to the public?

For BMO Capital Markets analyst Daniel Salmon, Netflix remains his No. 1 choice–for now.

“Improved vaccination rates could help Disney continue to be a solid ‘re-opening’ play, but with considerable multiple expansion… we step to the sidelines,” writes BMO’s Daniel Salmon.

Salmon downgraded his rating on the stock of the Walt Disney Co. from “outperform” to “market perform,” and cited the “considerable multiple expansion recently for both initial vaccine news and Thursday’s direct-to-consumer investor day.”

According to the Hollywood Reporter, “Disney’s stock hit an all-time high as Wall Street lauded CEO Bob Chapek and his team for strong execution and an attractive slate of streaming content.”

Salmon recently proposed his stock plans in a report called “Now the Hard Part Begins,” which shows that he raised his Disney stock price target by $20 to $185. However, Salmon maintained that “Netflix retakes the top pick mantle.”

Salmon continued: “To be sure, the Disney+ sub forecasts surpassed the most bullish expectations and were supported by an incredible amount of new content. But our favorite ‘story’ stock closes out this recommended chapter between direct-to-consumer investor days nevertheless.”

Salmon did not neglect Disney’s bright future but noted that he did not see the necessary viability in Disney’s ESPN+, despite increased subscriber numbers.

“There was otherwise relatively little on how Disney sees live sports and ESPN shirting to streaming,” Salmon wrote. “It proved moot in light of the Disney+ subscriber targets, but we expect this will be a question that continues to hang over ESPN/Disney, even if investors ultimately know there is a very different relationship with sports content versus general entertainment.”‘

Salmon’s notes echo Movieguide®’s opinion that Disney did little on Investor Day to show how they will turn a profit.

As we previously reported:

Among the announced projects are a Buzz Lightyear origin story from Pixar, and spin-off series based on CARS, BIG HERO 6, MOANA, and PRINCESS AND THE FROG.

It seemed like welcome news, and Disney stocks surged.

There’s only one problem – can Disney make any money off these titles if they spend less time in theaters and more time on Disney+. It’s simple economics, if Disney offers all their content for a low monthly subscription of $6.99, they lose out on a significant portion – if not all – of their profit for each movie. A family and friends can watch lots of Disney, Marvel and Pixar movies each month, that they would have to pay around $10 per person each to watch at the theater.

Take the 2020 version of MULAN as an example. The movie was one of the first to be delayed and eventually completely removed from a theatrical release in the United States due to the Coronavirus pandemic. MULAN supposedly cost Disney $200 million to make. To date, it’s grossed less than $70 million worldwide, leaving Disney in the hole for more than $130 million.

Now why would they want to apply that same treatment to much of their future products?

What’s unfortunate, still, is that other studios appear to be following suit.

While Warner Bros. announced their partnership with HBO Max, Salmon said he was surprised not to see a statement from Disney regarding their decisions for upcoming Disney releases like PINOCCHIO, PETER PAN AND WENDY, and even the expected theatrical release of BLACK WIDOW.

“To our surprise, there was no new news on major films moving to Disney+ versus theatrical runs,” Salmon wrote. “Management held firm on its view that there remains a place for a strong theatrical window for tentpole films and will leave Warner Bros. to figure out how to quell talent’s questions about back-end compensation for shifted films.”