Disney Stock Lost a Bull. The Pivot to Streaming Will Be Painful.

Walt Disney stock was falling on Friday after an analyst at Macquarie cut his rating, citing a bumpy road ahead for the global entertainment company.

Macquarie analyst Tim Nollen lowered his Disney stock (ticker: DIS) rating to Neutral from Outperform in a Friday note. He also brought down his price target to $103 from $125.

Shares were down 2.4% Friday afternoon, to $91.56.

Nollen cited the ongoing pivot to streaming, or direct-to-consumer, as something that will weigh on earnings due to the impact on Disney's traditional television business.

"We still appreciate Disney's ability to successfully transform to a DTC-first streaming business over time, but now see more interim uncertainties," he wrote. "We see too many structural and macro headwinds extending beyond the quarter to support an Outperform rating."

Disney didn't immediately return a request for comment.

Nollen expects traditional networks to struggle, with ad revenue declining in the fiscal third quarter and affiliate revenue remaining negative going forward, as cord cutting puts pressure on the business. That creates a sense of urgency for Disney to make its streaming side profitable.

"Progress is underway in streaming as operating losses abate, but we believe prior guidance of DTC attaining profitability during FY'24 may now be off the table," he wrote.

Nollen expects the company to finally buy Comcast's one-third stake in Hulu at a price "probably above" $9 billion. That price tag, paired with a slower pace of subscriber growth , may lead to longer losses for the direct-to-consumer business beyond fiscal 2024. He wrote that Disney must also decide when it will finally put its flagship ESPN programming on streaming.

"Doing so is inevitable, and it's hard to see how it will be smooth: steep losses assumed in the pay TV bundle will have to be offset by strong subscriber sign-ups at a presumed high price, and before Disney even gets there it has to negotiate terms with pay TV operators on content, and with the leagues on costs for streaming rights," he wrote.

He also predicts growth in the Disney's parks business will slow, adding that business would be further hurt by a potential recession.

Nollen also weighed in on the Disney's dispute with Florida Gov. Ron DeSantis. The company is suing the governor, accusing him of orchestrating a targeted campaign of government retaliation after Disney criticized legislation that restricts the discussion of sexual orientation in Florida elementary schools.

DeSantis later signed a bill that replaced the board of a special district that let Disney self-govern its Florida resort and theme parks with outside appointees. The DeSantis administration has argued the firm had no right to "operate its own government or maintain special privileges not held by other businesses in the state."

In the latest development, the company told staff on Thursday that it scrapped plans to build a sprawling campus in Lake Nona, Fla., according to a memo viewed by Barron's. It also will no longer relocate some California employees to the state. The company cited "considerable changes that have occurred since the announcement of this project, including new leadership and changing business conditions."

Nollen notes Disney has benefited from tax privileges, but is one of Florida's largest employers and a significant driver of revenue from tourism.

"Hence, it is fair to say that both the company and the state have mutually benefited from this agreement," Nollen wrote. "While the outcome may not significantly impact Disney's financials, it may remain a drag on investor sentiment."