Needham thinks Disney should shutter ABC network following the Jimmy Kimmel controversy

Needham recommends that Disney consider shutting down its ABC network instead of selling it, suggesting that the current circumstances, including public backlash over perceived free speech issues, make ABC a less valuable asset.

The firm highlights that a one-time write-off of $10 billion to $11 billion for ABC could ultimately lead to a significant increase in Disney's shareholder value (approximately $20 billion) and improved annual revenue growth over the next decade.

A National MediaSpots survey reveals that only 0.5% of the U.S. population engages with ABC, with a demographic skew that limits advertising revenue potential, prompting Needham to suggest that simulcasting ABC content on Hulu could enhance revenue opportunities.

Needham maintains a "buy" rating for Disney with a price target of $125, indicating confidence in the company's potential for a nearly 10% upside moving forward.

Recommendation Rating: Strongly Recommend Operational Reevaluation of ABC Network

According to Needham's assessment released on Tuesday, the firm strongly believes that Disney (NYSE: DIS), a leader in the media and entertainment sector, should consider shutting down its ABC network rather than pursuing a sale. This perspective emerges amid controversy surrounding the suspension of talk show host Jimmy Kimmel for remarks related to the late pro-Trump activist Charlie Kirk, which led to public outrage concerning the network's perceived infringement on free speech. Following the backlash, ABC opted to reinstate Kimmel's show.

Furthermore, FCC Chairman Brendan Carr has hinted that regulators maintain the authority to intervene with television broadcasters, emphasizing that these entities must fulfill "public service" responsibilities due to the substantial taxpayer value—estimated between $50 billion and $88 billion—afforded to them at no cost. While Needham acknowledges the rationale behind this view, they argue that the trade-off in terms of price and value appears unfavorable for U.S. taxpayers.

Needham has estimated that a one-time write-off of between $10 billion and $11 billion would constitute about 5% of Disney's $204 billion market capitalization. They assert that Wall Street would likely adjust for this write-off, treating ABC as a discontinued operation.

Post-write-off, Needham anticipates a 40-60 basis point increase in Disney's annual revenue growth over the next decade, projecting a cumulative $20 billion increase in shareholder value—approximately a 10% boost—due to an expansion in Disney's trading multiple by 0.2 turns. Additionally, this strategy could mitigate long-term federal regulatory risks.

In their research note, Needham remarked, "We disregard the lost value associated with the ABC affiliate network and overlook the public policy implications of having ABC as a distinct voice. Regulatory interventions from the FCC have rendered owning broadcasting licenses excessively costly and unstable for Disney shareholders." They further clarified their stance, stating, "We do NOT advocate for the sale of ABC as this process necessitates FCC approval for the transfer of broadcasting licenses."

A recent National MediaSpots survey indicates that only 0.5% of the U.S. population engages with the ABC network, with an average audience age of 58 years. Needham highlighted the significance of this demographic detail, noting that since the most lucrative advertising segments focus on viewers under 49, a considerable portion of ABC's audience contributes minimal or no advertising revenue.

To bolster revenue, Needham recommends that Disney explore the option of simulcasting all ABC broadcast content on Hulu, in addition to the existing ABC app. This move would allow viewers to access the same content on a less regulated platform, thus preserving potential revenue streams. "Disney's Hulu streaming service operates without regulatory constraints and attracts a younger demographic, with an average audience age of 37, thereby offering greater value per viewer for shareholders," the firm states. They suggest that Disney simulcast all content produced and aired by ABC and consider integrating it into the Hulu on-demand library. This strategy could diminish the risks associated with any potential future regulatory actions impacting viewership and revenue.

Needham maintained a "buy" rating for Disney, with a price target set at $125, representing a projected upside of nearly 10%.