Why Did Wells Fargo Upgrade Disney (DIS) Stock?

Walt Disney (NYSE:DIS) shares climbed on Tuesday morning after Wells Fargo (NYSE:WFC) upgraded the media giant’s stock.

Wells Fargo upgraded Disney from "market perform" to "outperform" and raised its price target to $116 a share from $109 a share, which would mark a 14% gain from Friday's close. The firm pointed to Disney’s new commitment to enter the streaming and over-the-top programming sector as the key reason for its renewed faith in the media powerhouse.

Disney recently announced that it expects to introduce a Disney brand direct-to-consumer streaming service in 2019. The company also hopes to roll out a streaming version of the struggling ESPN channel as soon as 2018.

“With DIS’s foray into direct-to-consumer (DTC) streaming, we can’t help but believe the TV ecosystem will soon embark on an accelerated over-the-top (OTT) path,” Wells Fargo analyst Marci Ryvicker wrote in a note to clients Monday. “Thus, investors may need to start thinking about increasing exposure to those media cos. with solid streaming strategies, such as CBS (NYSE:CBS) , FOXA (NASDAQ:FOXA) , and DIS…”

Disney announced in early August that the company would leave Netflix (NASDAQ:NFLX) to set up an exclusive streaming platform for all Disney and Pixar movies.

"We like the entry point for DIS even if we're early. … We view the risk/reward as heavily skewed to the upside," Ryvicker noted. "We continue to believe Disney is a premium brand with one of the best management teams in media."

Wells Fargo also said that if Disney’s move into video streaming is successful that “we might even see the stock return to trading at a 1-2x premium to the market, putting the stock at $128/share.”

Disney’s stock has had an up and down year thus far, and shares of the conglomerate have dropped significantly from its 52-week high water mark of $116 a share that it reached in April.

Shares of Disney popped over 1% in morning trading on Tuesday, but now hover around 0.50% higher than Friday’s closing price at $102 a share.

Other Note Highlights

Ryvicker upgraded Disney based on a strong belief in the company’s ability to successfully progress into the world of digital streaming. The same Wells Fargo note cautioned investors about media companies that don’t have enough exposure in nonlinear television.

The analyst pointed to three companies—Discovery Communications (NYSE:DIS) , Scripps Networks (NASDAQ:SNI) , and Viacom (NASDAQ:VIA) —as media outlets that could potentially be hurt as the shift towards streaming continues to heat up.

Ryvicker singled out Viacom as being particularly exposed and downgraded the stock accordingly. Ryvicker downgraded Viacom’s non-voting stock to “market perform” from “outperform.” The analyst also lowered her price target from $43 a share to $32 a share.

Shares of Scripps Networks fell marginally, while Discovery Communications saw its stock price sink by around 1% to touch a new 52-week intraday trading low of $21.89 a share.

Viacom’s class B shares dropped by over 3.20% to hit a new 52-week intraday trading low. The company’s voting (NASDAQ:VIA) shares dipped by roughly 2%.

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