Walt Disney (DIS) reported strong Q3 2022 earnings on Aug. 10 after the markets closed. The entertainment giant beat analyst estimates on both the top and bottom lines.
Disney stock last traded above $200 in March 2021. While there’s a lot to be excited about from its latest earnings report, one piece of its business could hold it back from getting there in the next 6-12 months.
Care to guess what it is? Don’t worry. I’ll reveal momentarily the issue I believe could burst Disney’s feel-good story. In the meantime, let’s consider all of the positives from Wednesday’s announcement.
Disney Passed Netflix
If you combine Disney+, Hulu, and ESPN+, the Mouse had 221.1 million subscribers at the end of the third quarter, one million more than Netflix (NFLX).
Disney+ accounted for 69% of its streaming subscribers in the quarter. The company’s streaming service has become such a vital part of its overall business that the word Disney+ was mentioned 46 times in its Q3 2022 conference call.
Disney reported adding six million Disney+ subscribers and another 8.4 million through Disney+ Hotstar, the company’s streaming service in India. That’s a 10.5% increase over Q2 2022. Year-over-year, Disney+ subscribers worldwide jumped 31% over last year. Disney+ is now available in 155 global markets.
In a separate press release, Disney announced on Aug. 10 that it would launch its ad-supported version of Disney+ on Dec. 8 in the U.S. To make way for the ad-supported plan, which will cost $7.99 per month, the ad-free version jumps 38% to $10.99.
Hulu, which already has ads, will see its ad-free version rise by $2 to $14.99, while the ad-supported version jumps $1 to $7.99. ESPN+ with ads jumps by 43% to $9.99, from $6.99 a month. All of these plans have cheaper annual rates.
CFO Christine McCarthy reiterated that the company expects Disney+ to be profitable by September 2024.
The Other Good Stuff
As I said earlier, Disney beat on revenues -- $21.95 billion compared to the analyst estimate of $20.96 billion -- and earnings per share -- $1.09 versus the consensus of 96 cents.
The company’s Parks, Experiences and Products division had a colossal quarter, generating $7.4 billion, 72% higher than a year earlier. Equally important, its operating profit jumped 518% year-over-year to $2.2 billion.
Two things have worked in the division’s favor: Its domestic parks and cruise ships haven’t had any Covid-19 restrictions. Secondly, it instituted a fee for park visitors interested in line-shortening privileges. That’s expected to generate significant revenues.
Lastly, the company’s 22 domestic hotels were at 90% occupancy, while park attendance on occasion has been higher than before the pandemic.
I’ve always felt that the company’s parks and resorts -- not so much the retail -- was the unsung hero in Disney’s business model. When it goes, Disney goes.
Disney’s other segment, Media and Entertainment Division, which includes the streaming business, increased revenues by 11.3% to $14.11 billion, while its operating profit fell 32.0% to $1.38 billion. Advertising revenues and subscriptions both had healthy double-digit increases.
The One Downer
While its streaming business increased revenues by 19% in the quarter to $5.06 billion, it lost $1.06 billion from its operations, considerably higher than a $293 million loss a year ago.
The New York Times quoted Paul Verna, a principal analyst at research firm Insider Intelligence.
“‘Disney still faces economic uncertainty and intense competition,’ Paul Verna, principal analyst at Insider Intelligence, a research firm, said in an email, ‘but its quarterly performance should at least temporarily put to rest some of Wall Street’s gloomier perceptions about the company and, more broadly, about the entertainment industry.’”
Investors can look at the $1 billion loss -- it plans to spend $30 billion on content in 2022 -- in one of two ways.
The glass-half-full version says that its ad-supported version will more than pay for that content spend. The glass-half-empty view would be that a bunch of its subscribers move from ad-free versions to the ad-supported ones, stopping paid subscription growth in its path.
However, Variety reported in May that Disney wants many of its subscribers to move to the ad-supported product.
“Based on our Hulu experience, we actually have more AVOD [ad-supported video-on-demand] than SVOD [subscription VOD] subscribers,’ Disney CFO Christine McCarthy said, speaking Wednesday at the 9th Annual MoffettNathanson Media and Communications Summit. ‘We expect about the same percentage for both Disney+ and Hulu, just based on the experience curve that we’ve witnessed.’”
So, the most significant risk for investors is that the Hulu experience isn’t repeated with Disney+.
Initially, the company will run four minutes of ads per hour -- 15 and 30-second spots -- on the ad-supported streaming service. As time passes, it will roll out a complete offering of ads for its advertisers. The company continues to experience a positive response from its advertisers.
Ultimately, Disney stock remains cheaper than it’s been for some time, trading at 2.68x sales and a PEG ratio of 0.70.
Despite the question mark regarding its ad-supported streaming service and what it will mean for profits, I think long-term investors would be wise to buy at current prices because if all goes right, $200 will be here before you know it.
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