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Disney overtook Netflix as the streaming leader, and is expected to widen its lead

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Walt Disney Co. displaced Netflix Inc. as king of the video-streaming market, and it is expected to widen the gap.

Disney DIS, +0.33% seized the mantle three months ago as its potent content troika of Disney+, Hulu and ESPN+ reached 221 million customers, edging Netflix’s 220 million subscribers. Analysts expect Disney to report more than 10 million net new subscribers in the third quarter, which would greatly outdistance Netflix’s NFLX, -3.07% addition of 2.4 million subscribers in the period.

The competition should increase as both companies launch advertising-supported platforms in the fourth quarter — Disney plans to launch in the U.S. on Dec. 8 after Netflix NFLX, -3.07% unveiled its own ad-supported service for $6.99 a month in the U.S. on Nov. 3. And analysts still like Disney’s chances to outperform the streaming pioneer.

“Disney+ ad-supported will do very well and outshine Netflix” Corey Kulis, vice president of marketing at software company Verve Group, predicted to MarketWatch. “While Netflix needs to develop and partner for technology, stand up a new organization, get introduced to buyers, and so on, Disney has all this in place.”

When the Disney+ ad tier debuts in the U.S., and overseas in 2023, UBS analyst John Hodulik expects Disney+’s ad-tier service to add $1 billion in incremental revenues in its first 12 months. Macquarie Research analyst Tim Nollen models slightly less, an $800 million sales opportunity next year if all markets were to launch, but also foresees Disney’s direct-to-consumer revenue outpacing linear networks by the fourth quarter.

“We think near-term subscriber growth will accelerate on content releases and international expansion, and next year’s slate looks impressive too, after ‘Black Panther 2’ and ‘Avatar 2’ release in theaters in November and December, and follow on Disney+,” Nollen said in an Oct. 31 note that maintained an outperform rating and price target of $140.

Insider Intelligence expects the ad-supported tier of Disney+ to reach $1.02 billion in the U.S. in 2023, and $1.19 billion in 2024.

“Disney already knows its audience and the advertising industry incredibly well,” Ashwin Navin, CEO of Samba TV, told MarketWatch. “The significant opportunity to align with its top-tier content will accelerate new and untapped dollars flowing into Disney’s ad-supported streaming service.”

Disney’s subscription and revenue growth in video-streaming against the likes of Netflix, Apple Inc. AAPL, -0.19%, Comcast Corp. CMCSA, +2.04%, Inc. AMZN, +1.88%, Warner Bros. Discovery Inc. WBD, -12.87%, Paramount Global PARA, -3.95%, and others has been the focus of Chief Executive Bob Chapek as a financial catalyst for its wide range of businesses. The idea is that the so-called DTC model will accelerate and spur sales for theme parks, merchandise, traditional movies and TV, hotels and cruises.

Last week, Disney said it would launch a “limited test” of selling themed merchandise such as lightsaber collectibles and themed clothing tied to selected Disney+ shows and movies like “Star Wars,” “Black Panther” and “Frozen” for about a week.

What to expect

Earnings: Analysts surveyed by FactSet on average expect Disney to report adjusted fourth-quarter earnings of 55 cents a share, up from 9 cents a share a year ago.

Contributors to Estimize — a crowdsourcing platform that gathers estimates from Wall Street analysts as well as buy-side analysts, fund managers, company executives, academics and others — are projecting earnings of 65 cents a share on average.

Revenue: Analysts on average expect Disney to report $21.28 billion in fourth-quarter revenue, a jump from $18.5 billion a year ago. Estimize contributors predict $21.5 billion on average.

Stock movement: Disney shares have bounced between post-earnings gains and losses in recent years, rising after six of the past 12 reports.

Disney’s stock has tumbled 35.7% so far this year while the S&P 500 index SPX, +1.36% has dropped 20.9%. Shares of Disney have declined 6.6% since the company announced quarterly results three months ago.

What analysts are saying

In a note last week, Guggenheim analyst Michael Morris predicted Disney will add 10.8 million total direct-to-consumer subscribers in the fourth quarter. Netflix reported 2.4 million net member additions during its recently-completed third quarter, ahead of its guidance of 1 million.

Read more: Netflix’s CEO says, ‘Thank God we’re done with shrinking quarters,’ as first growth of 2022 sends stock soaring

Attendance at Disney theme parks remains balky in the COVID era. KeyBanc Capital Markets analyst Brandon Nispel noted domestic geolocation data tracking Disney attendance ended the quarter “somewhat negative.”

He said Walt Disney World was closed on Sept. 28-29 because of Hurricane Ian, and “we’re seeing [year-over-year] growth rates decelerate faster than expected.” Total Disney theme park attendance for September was 82% of 2019, pre-COVID, levels, Nispel said in an Oct. 19 note.

Disney shares on average are rated overweight with a price target of $136.75 by 28 analysts polled on FactSet.

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