KeyBanc downgrades Disney due to 'meaningful uncertainty' around the media giant

Published Thu, Jun 29 20235:52 AM EDTUpdated Thu, Jun 29 202311:26 AM EDT

It's difficult to stay bullish on Disney with several of its best-known business units facing challenges, according to KeyBanc. Analyst Brandon Nispel downgraded shares of the media and entertainment giant to sector weight from overweight. The firm does not have a price target for the stock. "We prefer to step aside, acknowledging meaningful uncertainty, and wait for further catalysts, as buying the dip has been a losing trade," Nispel said in a note to clients Wednesday. Nispel said expectations for the park business appear too high, and tough comparable periods are not adequately baked into those expectations. The firm's domestic theme park attendance data was weak for April and May, while Disneyland's growth from the 100th anniversary celebration was considered a contraction when compared with the 50th anniversary at Walt Disney World. Nispel anticipates a deceleration in revenue between the third and fourth fiscal quarters despite consensus expectations implying the opposite. Disney's direct-to-consumer business has also been unable to differentiate its churn compared with peers, he said. Disney+ and Hulu have both seen subscriber growth stagnate, with net losses expected in the third fiscal quarter. The company will likely need to better monetize on existing subscribers through price increases while simultaneously improving retention through strategies such as having a tiered subscription model for those who want to pay less. There may also be more challenges than initially anticipated with moving ESPN to streaming, according to Nispel. KeyBanc research shows interest in sports on linear TV is high, but a willingness to pay for it on streaming is lower. Movies offer little reprieve, he said, with the structural disinterest in movie theaters compared with before the Covid-19 pandemic likely to hamper Pixar releases. He noted that Disney's studios business has lost money for the past two years when excluding "Avatar: The Way of Water" and should going forward. Shares were down nearly 0.9% in premarket trading Thursday. — CNBC's Michael Bloom contributed to this report.