Why will Disney’s earnings drop be short-lived?

Why will Disney’s earnings drop be short-lived?

The earnings presented seem to defy all logic. Some reasons are obvious, but others seem like a bug in the metrics. But the “illogical” seems easier to justify.

“The first is the case this morning with Disney stocks, where the lack of expectations on the revenue side and subscriber growth have overshadowed a large part of the expected earnings,” says Martin Tillier on .

The firm’s earnings reaction was swift and decisive falling about 5%. This will have puzzled investors after a good EPS. The company reported earnings of $ 0.79 per share, beating the consensus at $ 0.31.

But the focus was elsewhere a loss of income and more worryingly, a loss of subscriber growth rate on Disney +.

“As I said, this ‘drop in a beat’ was not too difficult to understand, but it still fits the pattern of this quarter where negative reactions to earnings reports, weighed down by excessive expectations and high whisper numbers, are exaggerated. after any errors, even with respect to relatively minor errors in less important metrics. Given the general trend this season, that is clearly what is happening here, ”says Tillier.

Disney + has been the company’s workhorse in the face of economic shutdown during the pandemic. The problem is that the streaming signal has become a victim of its own success. They added 8.7 million subscribers last quarter, but that brings them to 103.6 million in total, or about a third of the population of the United States. Even with international exposure, growth from there has to slow down. “So if you look at Disney + as the future of the House of Mouse, a 5% drop in stocks seems pretty logical on weaker-than-expected subscriber growth,” says Tillier.

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But there is another way to see Disney +, it is not the future but yes a bridge between cash flow and profits while parks and cruise ships remained closed. It is a complement, but not the whole business. “Seen from that perspective, continued growth, even if it is slower than expected, is an advantage, and other news that was released yesterday will have much more impact in the coming weeks, months and even years,” says Tillier.

The change in health policies regarding COVID-19 in the United States is an important step for the normalization of the economy and much more for Disney than the growth of its streaming signal. Movies in theaters, cruise and park reopening, regardless of last quarter’s earnings, are the things that will propel Disney once the pandemic is finally over.

“However, I would give a word of warning here. In many cases this quarter, the negative impact of these perceived “weak” earnings releases has continued for a few days as sales drive more sales and analysts adjust their forecasts for the next quarter lower. That means It can be helpful to wait a day or two before jumping in, but if there is evidence of a rebound in the current market, I would buy anyway. However, whether it is today or in a few days, the long-term positive news will easily outweigh the short-term negative news and it looks like Disney will rebound strongly after this drop, ”concludes Tillier.

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