NBA rights renewal key for both Walt Disney and Warner Bros claims Macquarie Research

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By Sam Boughedda

In separate notes to clients Wednesday, Macquarie analysts lowered the firm's price target on Walt Disney (NYSE:DIS) to $110 from $120, maintaining an Outperform rating on the stock and maintained an Outperform rating and $16 per share price target on Warner Bros. Discovery (NASDAQ:WBD).

They told investors that direct-to-consumer (DTC) and the NBA rights renewal are critical for WBD in 2023.

"We are trimming estimates as we assume steeper near-term ad revenue declines of 15% in Q4, which will likely spill over into Q1 and Q2; WBD’s presence in Europe likely brings worse network numbers than peers. Networks may never grow on the top line again but maintain 40%+ adj. EBITDA margins," they wrote. "Getting DTC right is therefore critical, and we maintain the view that HBO and Discovery+, with the Warner Bros. studio library and output behind them, sit in the top tier of streaming services, with a built-in global opportunity."

The analysts added that the NBA contract renewal "may be the most important item this year."

"We expect the league to demand at least a 2x price increase, as the NFL did in its renewal beginning in ’23 – and we calculate WBD can handle this. We looked back to predecessor Time Warner’s last NBA deal in 2016, where the annual average rights cost amounted to 11% of Turner networks’ revenue, or 7% of Turner+HBO," they added. "Double that rights fee on new WBD linear networks and linear+DTC works out to the same ratios in 2025e, when the new NBA deal would start. We would hope new NBA rights include substantial streaming availability, as well as international options given WBD’s global presence and the popularity of the NBA worldwide."

For Disney, the analysts believe the stock "can recover if Disney sticks to plan on DTC profitability," while the NBA rights renewal "could help determine ESPN’s streaming future."

They stated that CEO Bob Iger’s potentially biggest legacy this time will be determining the fate of ESPN. "We don’t know if the numbers add up yet for ESPN to break the linear bundle and go completely DTC, but we wonder if the NBA renewal that will likely be negotiated this year pushes ESPN a step closer," explained the analysts.

The analysts "modestly reduced FY’23E EPS from $4.31 to $4.21 and ’24E from $5.86 to $5.69 on lower near-term ad growth estimates."