Disney earnings are a ‘consumer tracker’ for the broader economy, analyst says

Wells Fargo Securities Senior Analyst Steven Cahall joins Yahoo Finance Live to discuss Disney stock, Disney+ offering an ad-supported tier, and subscriber growth.

Video Transcript

BRIAN CHEUNG: Let's bring in one analyst who's been watching all of this. Wells Fargo Securities senior analyst, that is Steven Cahall. Steven, it's great to have you on the program. You have $153 price target on the company. That's down from your $182 prior target. Just wondering what your takeaways are. We were talking about sports. I know that was a question that you posed Bob yesterday.

STEVEN CAHALL: Yeah. Yeah, and thanks for having me on this morning. Always enjoy talking about it. So I'd say a few key points. First, just, you mentioned our target coming down. The thinking there, Disney really is, in many ways, a consumer tracker. If you think about anybody that's got kids and family, they're probably spending some of their money on Disney every year.

Folks who are into cruises or going to theme parks, they're going to have some money going to Disney every year. If you're a sports fan, you probably engage with ESPN and have some money being spent every year. So when we see the market going down on the risk of a recession, you know, Disney is going to track some of that, to a certain extent.

But of course, the biggest theme is not more their consumer facing businesses, but their direct to consumer business at this point. You talked about their reaffirmation of guidance. The big one for us is that they basically said as they exit this fiscal year, they will be on track to meeting that guidance. There'll be a sort of a run rate that gets them there. So that's the event that we're looking for. And you mentioned the $32 billion in content spend. There's no better way to get there than to throw everything in the kitchen sink at it with that huge balance sheet.

AKIKO FUJITA: Yeah, Steven, your question got a lot of attention because you specifically asked about whether, in fact, Disney would consider spinning off ESPN+ as its own. I'm curious what you're thinking here. Was it about Disney potentially offering the games that we see on some of their linear channels right now, alongside a new offering on ESPN, or potentially moving everything over? And do you see that as potentially a way to unlock some of the value there?

STEVEN CAHALL: Absolutely. And it's certainly not an either/or. We wouldn't think that they would take that content out of the linear bundle and put it exclusively onto ESPN+. But we do think there's going to be a point in which for maybe it's $20 a month or $25 a month, you would be able to subscribe to ESPN as an a la carte streaming product. And that's going to have all of the featured live sports content that's currently on linear ESPN.

And as you know, some of the peers like [AUDIO OUT] and Paramount with Paramount+, they've started to put things like NFL rights onto those a la carte streaming platforms. Disney hasn't yet done that with ESPN+, but again, we think that day is coming at some point. We think that'll create value for the stock when it does.

BRIAN CHEUNG: Now, Steven, as far as Disney+ itself, we know that the strength of the content is not in question at all whatsoever. You still have "Encanto," for example, one of those very popular movies during the quarter. Has that kind of reached saturation already? We know that the subscriber levels that we're seeing from the Disney bundle is essentially approaching Netflix level. So I guess the question is, every new add that you have now is probably going to get more difficult than it was in the first three months of this product's existence.

STEVEN CAHALL: There's no doubt that adds are becoming more expensive. And very simplistically, I think on its first day, Disney+ had 10 million domestic net adds. They didn't have to spend a lot to get those first 10 million, right? Those are Disney superfans who are probably going to have that service for the entirety of their lives at almost any price. As you get further along, the elasticity curve changes. It gets more expensive. You've got to find something new and different for that incremental subscriber.

And that's why in that $32 billion of content spend, one of the areas that Disney is really trying to focus on is general entertainment. And remember that they bought Fox or a lot of the studios from Fox a few years ago. That included the Hulu stake. That included a lot of original content that's outside of the norm of what you might think of as Disney branded content. That includes networks like FX. It includes studios like Searchlight, which won Best Picture last year for "Nomadland." So they're really starting to expand the type of content that they produce in order to start to put more stuff onto that service to appeal to a wider audience.

AKIKO FUJITA: Steven, as we look ahead to this ad-supported offering for Disney later this year, how many subscribers do you think a cheaper price point is going to bring onto the platform?

STEVEN CAHALL: Yeah, that is a hard question. So I'll admit that I don't have a great answer for that as yet, but an interesting experiment to look at is Hulu. So Hulu has an ad light and an ad-free tier. Both have a subscription price. And then the ad light tier has advertising as well at a lower subscription price. About 2/3 of Hulu users actually choose to pay the lower subscription price and watch commercials. And Disney's ability to monetize that subscriber through the advertising means total RPU is higher than the ad-free product.

So it certainly made Hulu a bigger TAM, and it made Hulu more profitable with higher RPU. Whether or not we'll see that same SKU with Disney+ remains to be seen. I don't know if you'll see 2/3 of the subs go to an ad-supported model, but certainly, it's going to make it appealing to folks who might find the direct subscription fee a little too high. And from Disney's perspective, it's all kind of found money, you know? So this is just incremental subs without a lot of incremental cost for them, since they're already such a big advertising company.

BRIAN CHEUNG: For a legacy company like Disney, found money not necessarily such a bad thing, especially from a growth standpoint. Wells Fargo securities senior analyst Steven Cahall, thanks again for stopping by the show this morning. Appreciate it.