It worked for Netflix, so will a password crackdown have the same effect at Walt Disney (NYSE:DIS)? We will soon find out. After announcing during Q4 that its three streaming services will be subject to password crackdowns, the entertainment giant has started sending out emails announcing that the enforcement will start taking place ‘in the summer.’
Management has said that it will begin seeing the benefits in the back half of the calendar year but how much of an impact will it have? Probably not quite to the same extent seen at Netflix, says Bernstein analyst Laurent Yoon.
“Netflix’s success in the crackdown suggests the range of potential outcomes for Disney, but two factors are likely to limit Disney’s upside,” said the analyst: “(1) number of shared accounts/ addressable base is lower vs. Netflix in absolute terms, and (2) conversion efficiency (to new member or new account) is going to be lower given the lower utility of Disney+ and Hulu vis-a-vis Netflix.”
Specifically, using Netflix’s cadence as a proxy, and anticipating 6 to 8 quarters to capture the full benefit once enforcement begins, Yoon reckons Disney will see ~$1.2 billion in incremental revenue from the endevour. At around 6% of FY23’s DTC revenue, that’s not that much, but as it will have a “higher contribution margin from the same content spend,” Yoon anticipates most will convert to FCF (free cash flow).
Yoon says that number could probably swing in either direction but not dramatically so, expecting the full range of the outcome to be between $1 billion to $1.5 billion — with more than 70% FCF conversion, leading to the “accelerated profitability” of the DTC segment over the next couple of years. “We do not see much downside to this range, but cautiously recognize that the upper limit could be higher given the nature of the content and the audience for Disney+ could lead to higher than assumed conversion rate,” the analyst further said.
To this end, Yoon reiterated an Outperform (i.e., Buy) rating on Disney shares, while raising his price target from $115 to $120, suggesting the shares will climb 11% higher over the next 12 months. (To watch Yoon’s track record, click here)
Amongst Yoon’s colleagues, 16 join him in the bull camp, 4 remain on the fence and one implores to Sell, all culminating in a Moderate Buy consensus rating. The average target stands at $116.71, implying shares will generate about an 8% return a year from now. (See Disney stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
