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What to do with ESPN?
That question hangs over Walt Disney Co. as it prepares to report fiscal third-quarter results on Wednesday.
Like a multibillion-dollar albatross, the cable sports network has devolved from cash cow to cord-cutting victim as more people cancel their cable subscriptions and the costs of sports-broadcasting rights rise. Last month, Disney
DIS,
Chief Executive Robert Iger said ESPN was seeking a strategic partner and was open to selling an equity stake. The network, which is owned by Disney and led by Jimmy Pitaro, has talked to Major League Baseball, the National Football League, the National Basketball Association and the National Hockey League.
ESPN headlines several near-term headaches for what has recently been a not-so-magic kingdom. Already grappling with writers’ and actors’ strikes that have paralyzed production in Hollywood, Disney has also stumbled through recent high-profile box-office misses — among them “The Little Mermaid” and “Indiana Jones and the Dial of Destiny” — the loss of streaming subscribers over the past two quarters and a steep decline in linear-TV advertising that is roiling the industry. Throw in a political standoff with Florida Gov. Ron DeSantis and you have a five-alarm corporate fire.
“We are increasingly worried about advertising trends. Given viewership trends
remain highly negative, declining around 10% [year over year] on average, this clearly bodes very poorly for forthcoming advertising revenues,” Atlantic Equities analyst Hamilton Faber said in a note last month, in which he slashed his Disney price target to $76 from $113.
Disney’s stock has tumbled 22% to $86.28 over the past six months.
In trimming his price target 9% to $94 and downgrading Disney shares to neutral, Tim Nollen, Macquarie’s senior media tech analyst, sees “too many near-term issues” such as weak TV ad sales, direct-to-consumer declines, softening parks trends and the Hollywood strikes. The July 4 weekend was the slowest at Walt Disney World in nearly a decade, the Wall Street Journal reported.
“Disney’s cost cuts may help protect earnings, but these top-line issues are concerning,” Nollen wrote.
The company’s direct-to-consumer segment, which includes Disney+, is of particular concern. It lost $1.7 billion in fiscal 2021 and more than $4 billion in fiscal 2022, and it is expected to lose nearly $3 billion this year, according to Gimme Credit analyst Dave Novosel. Disney finds itself in a dogfight with Netflix Inc.
NFLX,
Apple Inc.
AAPL,
Amazon.com Inc.
AMZN,
Warner Bros. Discovery Inc.
WBD,
Comcast Corp.
CMCSA,
and others.
Disney’s future is inexorably linked to Iger, who recently agreed to a two-year contract extension through 2026. Iger’s restructuring plan to slash $5.5 billion in costs — including 7,000 layoffs — and his deep institutional knowledge of Disney gives analysts hope that things will turn around. He told CNBC he was open to selling Disney’s ABC broadcast stations, FX and National Geographic.
“Iger staying until late 2026 gives investors higher signal quality regarding [Disney’s] path for the next 3.5 years, a reasonable investment time frame,” Needham analyst Laura Martin said in a note in mid-July.
