Disney reported stellar results which took many analysts by surprise. Trading at roughly 25% from its recent lows, it seems apparent that Disney is once again the talk of the town as investors make a U-turn on their stance towards the company.
Of all their business segments, investors were most keen on Disney’s DMED : DTC segment which is short for “Disney Media and Entertainment Distribution: Direct to Consumer”. Simply put, this segment refers to Disney’s various streaming services which include Disney+; Disney+ Hotstar; ESPN+; Hulu; and Star+.
In this article, we’ll looking at why investors consider this key segment to be the deal breaker for Disney and how Disney is shaping up to be a long-term hold worthy of consideration.
Held up by more than pent-up Demand
The recent spike past the $110 near-term resistance appears to be fuelled by more than just a relief rally. For Disney, this recent rebound is likely to be supported by its recent earnings where all key metrics beat analyst expectations.
- Earnings per share: $1.09 per share vs. 96 cents expected, according to a Refinitiv survey of analysts
- Revenue: $21.5 billions vs. $20.96 billion expected, according to Refinitiv
- Disney+ total subscriptions: 152.1 million vs 147.76 million expected, according to StreetAccount
In terms of revenue growth, we are looking at a 26% increase from the preceding year which was fueled by better revenue growth in both their Media & Entertainment Segments (DMED) [+11%] and their Parks & Experiences Segments (DPEP) [+70%].
While an increase in revenue for their parks segment was surely expected due to the gradual relaxation of global covid measures, the key topline figure which much of this rally seems focused on was how their Disney+ net subscribers actually increased despite volatile market conditions.
With an addition of 14 Million subscribers this quarter, this number not only beat estimates by 44% but has now allowed for Disney to officially overthrow Netflix as the leader in the streaming space. (Disney+ total 221 Million Subscribers vs Neflix total 220 Million)
Streaming Media War – A leader emerges
Late last year, the market lost its appetite for streaming companies. The general mood back then was one of reopening in which case it was clear that the growth of anything “digital” would most certainly have come to a tipping point. Coupled with other macroeconomic factors such as inflation and interest rates etc. the stock price of the three leading media companies fell with Netflix leading the dive.
While some may argue that Disney had a “physical experience” element to it in the form of its parks & attractions, it unfortunately, wasn’t spared as just a month ago, the stock crashed by almost 50% from its all-time high. (Retesting its $100 support level).
Since retesting its $100 support, it was clear that the sell-off warranted a buying opportunity as Disney is now leading relief rally having recovered by almost 25% since its $100 lows.
3 reasons why Streaming is not dead for Disney
Based on my findings, my thesis is that this rebound has been caused by an underlying change in sentiment towards Disney as a market leader in the streaming segment. The following support my thesis,
1. Growth where others failed.
At the start of the year, most streaming services took a hit as Netflix reported a slowdown in growth. The market saw Netflix as a sort of “index” when it came to the performance of streaming businesses. As such, the expectation was for all other streaming companies such as iQiyi, Disney, Discovery etc. to experience the same decline in qoq subscribers.
While the narrative behind exponential growth was most certainly over, subscribers continued to grow for Disney which I suspect could be attributed less to the organic growth of the streaming industry but rather to how Disney was gaining market share from its competitors.
Combined with Hulu and ESPN+, Disney said it had 221.1 million streaming subscribers at the end of the June quarter. Netflix said it had 220.7 million streaming subscribers. “Disney is gaining market share when Netflix is struggling to add more subscribers,” Investing.com analyst Haris Anwar said. “Disney has still more room to grow in international markets where it’s rolling out its service fast and adding new customers.”
Disney+ tops Netflix on streaming subscribers, sets higher prices, CNA
If we could add some context to these numbers, we are looking at how Disney was able to reach these numbers in less than 2 years whereas Netflix took an estimated at least 8 years to reach that same level.
2. Change in Subscription Models + Subscription Hike
With this, the underlying problem that Disney is trying to solve is the issue of ARPU (Average Revenue per User). This is a problem as Disney+ is far from profitability. Any hope of profitability would come from guidance directly from Disney which currently reaffirmed that “Disney+ will become profitable by the end of its fiscal 2024 year.” In an effort to bring this guidance a little “closer” to the present, Disney is hard at work in ensuring that its ARPU continues to rise in the coming quarters.
Note that Disney did take a huge hit with regard to ARPU as they adopted a classic ‘market penetration’ pricing strategy where they deliberately priced their service low in order to gain market share from their competitors. (Remember the days of $6.99 Disney+?). While this meant that Disney would earn less money, it undoubtedly gave them the much needed advantage when it came to attracting subscribers which was the one metric that investors focused on qoq.
Fortunately for us as investors, ARPU is not difficult to understand given that Disney+ only has one source of revenue and that’s from its subscription fees to its users. However, this will soon change as Disney reported the following this earnings call,
- Creation of 2 tiers of Disney+ Subscriptions.
- Premium $10.99 (Represents an ad-free model, approx.. 38% increase from present rates)
- Basic $7.99 (ad-supported model)
With the ad-supported model, Disney+ will soon have an alternate source of revenue which may (depending on users behavior) end up generating even more revenue than their previous membership model. Imagine a scenario where with the release of the much anticipated Obi-wan series, ad-space which Disney can charge to willing parties would be sky-high given how the entire “world” will be watching Obi-wan at its release. Merely speculation on my end at this point but certainly a viable revenue source for Disney.
3. Shift in Investor Focus – From Subscriber Count to profitability
“As a result of this slowdown in new subscriber additions, we have seen many in the industry pivot to a new wave of sobriety” — with a focus on streaming profitability, MoffettNathanson principal analyst Michael Nathanson wrote in an Aug. 11 research note. “We on Wall Street have taken notice. Gone are the sum-of-the-parts models using revenue multiples or even the metric of EV/content spending. From here on out, we hope the focus for streamers is return on invested capital and free cash flow generation.”
Disney Now Has More Total Streaming Subscriptions Than Netflix — but Disney Generates Much Lower Per-Sub Revenue, Variety
Similar to how investors have lost interest in money-losing companies, it is apparent that moving forward, less emphasis would be placed on subscriber count and more on profitability. With this, investors are willing to turn a blind eye to decreasing/slowing subscriber count so long as losses continue to narrow.
This means that investors should not be alarmed should the subscriber count for Disney+ reach a tipping point. At some point, it will fall and it is likely that the media would slap a headline similar to what Netflix is experiencing at present. After all, headlines like “Disney+ loses subscribers” will always attract more readers than “Disney+ narrows operating losses”.
On this note, guidance has also been lowered for Disney in 2024 where “Disney now projects between 215 million and 245 million total Disney+ customers by the end of September 2024. That is down from the 230 million to 260 million which Disney had been forecasting.” (Source)
Closing thoughts: What I’m concerned about Disney
In my opinion, my personal concerns for Disney+ are less about their models or subscriptions but more on their content which of late seems to have barely met audience expectations. Reference to this link from Rotten Tomatoes which shows the ratings of all Marvel Movies according to their release dates. It is clear that ratings have fallen of late with Dr Strange and Thor both leaving viewers rather “lukewarm”.
It was most unfortunate that I left Thor: Love and Thunder feeling less than contented which does make me wonder if there is some kind of “Marvel/Starwars/Disney” fatigue going on. Just some thoughts to ponder on, do share with me your thoughts in the comments below!
