A Deep Dive Into Disney’s Streaming Operations After A Tough Q2

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DIS: Walt Disney logo
DIS
Walt Disney

Disney (NYSE:DIS) published a mixed set of Q2 FY’23 results on Wednesday, with earnings missing consensus estimates, while the flagship streaming service Disney+ posted its second consecutive quarterly drop in subscribers. Disney stock fell by close to 9% in Thursday’s trading as investors processed the unexpected decline in subscriber figures. However, we think that the sell-off was overdone, and believe that Disney stock looks like a relatively compelling bet at current levels of about $92 per share.

Excluding the subscriber drop in the streaming operations, Disney’s performance was largely as expected. The company’s parks and experiences division saw sales grow by a robust 17% driven by rising attendance at the company’s parks. The large media and entertainment distribution segment saw sales rise by a muted 2%, amid economic headwinds and concerns in the advertising market. Coming to the direct-to-consumer streaming business, overall sales rose by about 12% to $5.51 billion, although this marks a slowdown from the 23% growth levels seen in Q2 FY’22.

Now, investors tend to assign a large weight to the performance and operating metrics of Disney’s streaming operations, given the company’s sizable investments in the service over the recent years and also due to the stock’s relatively high earnings multiple which largely hinges on assumptions of profitability in the streaming business. For perspective, even post Thursday’s decline, Disney traded at about 21x consensus 2023 earnings compared to levels of about 15x in the years before the service launched in 2019.

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The subscriber losses in the Direct-to-Consumer business are driven by two broad factors. A bulk of the subscriber losses came from the Disney+ Hotstar operation in India, which lost about 4.6 million subscribers.  A decline here was largely to be expected, given that Disney lost rights to stream the popular Indian Premier League cricket matches. Moreover, the company’s price hikes over the last quarter also impacted numbers in the U.S. and Canada, with subscribers in the region declining by about 300,000. However, the international streaming business, excluding the U.S. and the Hostar operations, rose modestly.

That said, there were a couple of positive developments for the streaming business as well over the last quarter. Disney has been focusing more on the profitability of its streaming business. Losses in the steaming business are easing a bit, standing at $659 million over the first three months of the year, down from $1.1 billion in the previous quarter and from a $1.5 billion loss in Q4 FY’22. The company reaffirmed its guidance that the service is likely to turn profitable by the end of 2024. Moreover, monetization is also picking up. The core Disney+ service saw sales for average revenues per user rise to $6.47, marking a 12% sequential increase driven by the price hikes Disney instituted in December.  CEO Bob Iger has indicated that more price hikes could be on the way this year We believe investors may be giving undue importance to the subscriber losses at Hotstar, which has an average monthly revenue per user of just about $0.60 presently and still remains a long-term bet of sorts for Disney.

We remain positive on Disney stock with a price estimate of about $117 per share, which is about 25% ahead of the current market price. Disney’s overall profitability is likely to trend higher, driven by the improving profitability of the streaming operations and the company’s move to cut costs in other areas. For perspective, Disney plans to lay off as many as a total of 7,000 positions targeting cost savings of $5.5 billion. We also believe that the investments Disney makes toward its streaming will have a long lifetime value. Unlike Netflix, which monetizes its content investment solely via monthly subscription fees, Disney has a much larger value chain, given its theatrical business, theme parks, merchandise, and licensing operations. Disney’s content investments are also likely to be much more durable, given its iconic franchises, unlike Netflix which focuses a lot on one-off shows. See our analysis of Disney’s valuation for more information on what’s driving our price estimate for Disney and how its valuation compares with peers. See our analysis of Disney revenue for a closer look at the company’s key revenue streams and how they have been trending.

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Returns May 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 DIS Return -10% 6% -11%
 S&P 500 Return -1% 8% 84%
 Trefis Multi-Strategy Portfolio -2% 7% 235%

[1] Month-to-date and year-to-date as of 5/12/2023
[2] Cumulative total returns since the end of 2016

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