ESPN is becoming a financial issue for Disney, according to one Wall Street firm.
Barclays analyst Kannan Venkateshwar downgraded shares of Disney to “Underweight” from “Equal Weight,” Friday, pointing to increasing investor scrutiny of Disney’s ESPN sports network.
As the traditional cable bundle gets smaller and brings in less revenue, ESPN is exposed to what Venkateshwar characterizes as a “secularly fragmenting media environment,” reports Business Insider.
He believes the traditional bundle is not only going away, but that it’s not coming back.
“ESPN’s business model depends on the cross subsidy of the pay TV bundle,” writes Venkateshwar. Consequently, given ESPN’s fixed cost structure and variable revenue model, subscriber losses are likely to have a disproportionate impact on the business model.”
“In our opinion, ESPN accounts for a disproportionate share of Disney’s cash flow and the gap between OCF (7%) and EBIT growth (17%) over the last 2 years likely already points to this pressure from subscriber losses. This issue could be compounded by potential step ups in cost recognition,” according to the analyst.
Business Insider also highlighted research from BTIG’s Rich Greenfield, who believes Disney will now be able to package ESPN into a Netflix-like offering and turn the same kind of profit it has now.
Disney was down $5.21 to close Friday at $93.90 per share.