Expectations for Disney’s future may be too rosy, analyst says

On Wednesday, Disney (DIS) shares ended nearly 5% lower following Tuesday’s disappointing third-quarter results. While the company’s streaming plans have pushed the stock higher this year, one analyst said she thinks that expectations may be a little too high.

“We give Disney an A+ for strategy, but would wait to buy until estimates come down,” Needham analyst Laura Martin wrote in a note to investors. “We worry estimates are too high for the company’s 2019 and 2020 fiscal years. Disney has stated that 21st Century Fox plus consolidating Hulu will dilute its Q4 EPS (before purchase accounting) by about $0.45 and we expect downside pressure on Disney’s EPS from the FOX assets to persist through 2021.”

Walt Disney CEO Bob Iger attends the European premiere of "The Lion King" in London, Britain July 14, 2019. REUTERS/Henry Nicholls

Needham’s stock rating on Disney was kept unchanged at hold, while the consensus analyst rating is currently buy (22 buys, 9 holds, 1 sell).

Disney closed its $71 billion acquisition of Fox's (FOXA) entertainment business back in March. For the quarter, the company said its Studio Entertainment revenue grew 33%, and profit for the division grew 13% in its earnings press release.

Despite her cautious estimates outlook, when it comes to who will win the direct-to-consumer wars, the victor will be Disney, Martin says.

The ESPN logo is seen on an electronic display in Times Square in New York City, U.S., August 23, 2017. REUTERS/Mike Segar

Martin laid out six reasons for why Disney+ will beat out Netflix (NFLX):

1) At $7/month (and $70/year), it’s cheaper than Netflix’s basic plan.

2) It will have most Pixar, Marvel, Star Wars and Disney princess films when it launches on November 12.

3) Disney’s products reach 100 million households annually, which lowers Disney+ customer acquisition costs.

4) The new $12/month bundle comprised of Disney+ and Hulu and ESPN+, which should lower the churn rate.

5) Cash is king, with Disney’s strong balance sheet and free-cash flow giving it more staying power than Netflix.

6) Disney has several content creation studios under its corporate umbrella.

As of Wednesday’s close, Disney shares were up 23% for the year, while streaming rival Netflix were up nearly 14%.

Pamela Granda is a producer on Yahoo Finance’s closing bell show, The Final Round. Follow her on Twitter.

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