Disney's stock has sucked wind this year as the economic slowdown casts doubt on the pace of growth for the media giant's streaming service.
In a note to clients on Monday, Wells Fargo analyst Steven Cahall acknowledged that the "wheels have come off" Disney stock this year. Shares of the Dow component have plunged 34% year to date versus a 12% decline for the benchmark index.
Nevertheless, with the concerns well understood by investors, Cahall made a bullish case for the stock ahead of several key catalysts.
"We remain Disney bulls and think upcoming catalysts include Disney+ net adds progressing ahead of investor expectations, as well as potentially launching ESPN+ fully à la carte," Cahall said. "If we're right, direct to consumer within Disney has meaningful upside given where Netflix is trading (and Netflix feels less bad after 2Q22)."
Disney's decline this year puts it in line with the drop seen at Nike, giving both stocks the unwelcome honor of being the Dow's worst two performers so far in 2022.
"Most of that devaluation has been streaming, though recession fears and CEO headlines haven't helped," Cahall said.
Disney's relatively new CEO Bob Chapek came under fire earlier this year for deciding not to speak out against Florida's so-called "Don't Say Gay" bill. That in turn triggered a backlash from employees and a pullback in the stock price. The company later came out against the bill and vowed to help repeal the Florida law after it went into effect.
But Cahall believes it's time to start assessing Disney on future business potential, which may not be factored into a stock trading at some of the cheapest valuation multiples seen in years.
"We still think a lot more content equals a lot more subs, and that will drive stock upside as investors have broadly written off DIS's ability to generate more streaming hits," Cahall explained. "We think Disney's hold-back on ESPN+ fully à la carte has been not disrupting the linear apple cart."
He continued: "We see a big catalyst ahead and think management will too: launch ESPN+ with all sports rights at an average revenue per user (ARPU) that makes a direct to consumer subscriber just as profitable as linear. We think that magic ARPU is ~$25/month based on a ~$15/month linear affiliate fee with a 20% linear operating income margin. We think such a launch would bring in cord cutters/nevers, not cannibalize earnings and keep the peace with MVPDs. We can't say when, but we're confident this could happen."