Walt Disney Co. has been candid about the challenges it faces in linear television, but one analyst is worried that a “negative tipping point” looms in this part of the business.
Atlantic Equities analyst Hamilton Faber turned bearish on Disney DIS, -1.42% shares Tuesday, cutting his rating to underperform from neutral and lowering his price target to $76 from $113. Faber has concerns about linear advertising trends as well as a “degradation in performance” when it comes to Disney’s film franchises.
Disney shares were off 1% in premarket trading Tuesday. They’ve lost nearly 12% over the past three months.
“With linear TV ratings continuing to decline fast across general entertainment, andwithout the usual price gains that have been seen over the past 15 years, it is clearadvertising is set to fall far faster than we have seen previously,” he wrote, summarizing his takeaways from the ad industry’s recent upfronts, which are the annual media-industry events where marketers buy ads ahead of the fall TV season.
The trends aren’t particularly surprising given a dearth of quality programming on traditional TV, but they nonetheless may come to affect Disney in a significant way. Faber expects linear advertising troubles could trim nearly $1 billion off the company’s 2026 forecasted operating income.
Chief Executive Bob Iger recently suggested openness to a potential sale of some Disney linear-television assets, but it remains unclear how realistic that might be.
Linear TV “accounts for an extremely large portion of the company’s free cash flow and we also struggle to envisage potential buyers for these distressed assets, particularly if they are permanently distressed,” Faber wrote. “Additionally, it is likely that any sale would be well below Disney’s current core multiple and could actually be value decretive to the shares.”
He acknowledged that sports ad pricing has been “relatively resilient” despite challenges elsewhere in linear programming and said that sports trends “will serve to temper declines.”
Meanwhile, Faber has concerns about Disney’s franchises given declining critical scores for Marvel programming, weakening box-office performance and apparent fatigue around Marvel and Star Wars TV shows.
“Disney’s key franchises are the lifeblood of the company and we are concerned that Marvel, Star Wars and Pixar are all, to an extent, facing declining interest,” he wrote. “We firmly believe that Disney+’s fortunes hinge on demand for its key franchise content, and declining demand in this area is likely to show up in slower net additions as well as a longer period before the [direct-to-consumer] unit breaks even.”
In his view, Wall Street is “too aggressive” in modeling the future for Disney+, the company’s streaming service. Consensus forecasts are for 9.8 million subscriber additions outside of India in 2024, 9.1 million additions in 2025 and 7.2 million in 2026.
Given that Wall Street anticipates 6.6 million additions for 2023, Faber isn’t sure why there’s optimism about an acceleration. Disney has already conducted its rollouts in all major markets, and its “pull back in general entertainment spend is unlikely to make the service any more attractive than it currently is,” he wrote.
