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Wells Fargo slashes price target on Disney, cites subscriber growth concerns

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Steven Cahall, Wells Fargo Managing Director and Senior Equity Analyst, joins Yahoo Finance Live to breakdown why he's still bullish on Disney despite cutting its stock price target, estimating slowed subscriber growth for Disney's fourth-quarter and the importance of pushing out general content.

Video Transcript

JULIE HYMAN: Disney+ had really been the thing holding up Disney until recently, when the company said it was expecting some slowing subscriber numbers. That prompted our next guest to cut some of his estimates for the company. That is Steve Cahall over at Wells Fargo. He joins us now. Steve, how concerned are you about the subscriber growth at Disney? And what do you think it's going to mean for the overall strategy?

STEVEN CAHALL: Thanks for having me. So certainly there is some reconsideration of the Disney+ subscriber growth over the long term. Just as a reminder, Disney had provided long term guidance for Disney+ out to fiscal '24. So that gives it about three years. And they're about halfway there, give or take, depending on how investors decide to count the India subscribers.

And a couple of weeks ago, they did announce that they were going to have a little bit slower fourth quarter. They indicated a few reasons for that. But it has caused investors to sort of reevaluate how that long-term guidance looks, what they need to do to get there. And so there's just a bit of a reset to the subscriber growth that everyone's sort of grappling with.

BRIAN SOZZI: What's the longer-term risk to Disney here? If it's subscriber growth for Disney+, which has been a really big selling point here for the Disney bulls, if it's slowing down, why stay long the stock?

STEVEN CAHALL: That's exactly right. And the reason we're still bullish on it is I think what you've had now is this reassessment, is that Disney+, until now, has really quickly captured the big Disney fans, the kids and family genre where they're just so impressively dominant and have a brand that is truly global. Kind of the next half of the subscribers they need to get to their target are going to come from a combination of more content on those Disney brands, like Marvel and Star Wars originals, but also from more general entertainment content.

So remember, they bought Fox a couple of years ago. And that brought things like Hulu and Searchlight and FX then the Fox Television Studio. So they're going to be looking to drive a lot more general entertainment content to make parts of the genres of the service more like Hulu or HBO or Netflix and sort of fill in those other key genres. I think the reason that investors are taking a little bit of a reassessment here is because that's not where Disney has traditionally put a lot of its content. So there'll be some concerns as to whether or not they can deliver on that.

Now, what makes us still bullish is that they're spending the money to do so. They have a lot of content investment ahead. And in this business, not every dollar spent on content is successful. But if you've got a company like Disney that knows how to make good content and they put the dollars behind it, the chances of success are pretty high.

JULIE HYMAN: Steve, do you think, in retrospect, it was a mistake to make Disney+ and Hulu separate? I mean, as someone who is on Disney+ pretty frequently because I have kids, the content only goes so far, even though you know you can make as many Marvel properties as you want. But at some point, you do run out.

STEVEN CAHALL: Yeah, I wouldn't say it's a mistake just because it was the historical structure that Disney was only a minority shareholder in Hulu. Now they're a majority shareholder in Hulu. Comcast is a minority shareholder. My expectation is that in the not-so-distant future, they'll buy out Comcast's stake. And once they've done that, they'll look at integrating Hulu as a tile inside of Disney domestically.

But the great thing is that content is fungible. And so whether they're making a Hulu original or another original, they can provide it to their subscribers across these services relatively quickly. But I think more and more, you'll see Disney look to integrate its Hulu and its Disney+ services within the next few years.

BRIAN SOZZI: And Steve, I liked your recent note out. One, you say the cable industry is being re-evaluated by investors. And to that end, you mentioned that Discovery is a 2022 name. What did you mean by that?

STEVEN CAHALL: Yeah, so as you may recall, and thanks for reading my note, Discovery is merging with WarnerMedia. They've said that that will probably close around the middle of next year. And so what often happens is when you get a large transaction, one or both of the stocks involved, they sort of just sit back for a while until the deal is set to close.

When the deal closes, all of the estimates will change. Models will be revised. Price targets will be revisited. The company will roll out its strategy.

But between now and then, you just sort of get this air pocket around communication and valuation. And because the middle of next year in our modern digital world still seems like a lifetime away, I think that Discovery is one of the best [? B ?] stocks for the long term. But between now and 2022, we maybe shouldn't expect the shares to have a breakout.

JULIE HYMAN: Steve, thanks for being here. Good to catch up with you today.