There's little doubt that the COVID-19 pandemic will have a long-lasting effect on how people interact with the world. Much of the population of the U.S. and other countries has been asked to stay at home, and streaming video has emerged as one way for families to while away the hours of self-induced confinement.
Disney (DIS +3.65%) dropped a bombshell on Wednesday, revealing that its Disney+ streaming service has surpassed 50 million paying subscribers just five months after its much-publicized launch in early November. While a number of the company's other segments struggle under the weight of the coronavirus shutdowns, business at Disney+ is booming. Here's why investors should take heart.
The Child from Disney+ exclusive series The Mandalorian. Image source: Disney.
Hit the ground running
When Disney released its long-awaited flagship streaming offering in November, expectations were high. But Disney+ roared out of the gate, attracting more than 10 million signers by the end of its first day of availability, sending Disney stock to a record high. Its subscriber momentum continued, and by early February, when the company reported earnings, that number had risen to 28.6 million. Bundling Disney+ with ESPN+ and the ad-supported tier of Hulu provided a boost to both services, with subscribers growing to 7.6 million and 30.7 million, respectively. Now, Disney+ paid subscribers have topped 50 million, nearly doubling the 26.5 million it recorded to close out its fiscal first quarter, which ended Dec. 28.
To put the Disney+ numbers in context, Netflix (NFLX +0.86%) surpassed 50 million paid streaming members in the third quarter of 2014, about seven years after it first debuted streaming on its platform. The company now has more than 167 million subscribers globally and is expected to add another 7 million in the first quarter (though that forecast may be too conservative). Obviously much has changed in the world since the technology first appeared. Streaming is more widely accepted and the technology is much more user-friendly than it was in the early days. While this isn't meant to be an apples-to-apples comparison, it does illustrate the nostalgic attraction of Disney's content and the company's global reach.
The rollout of Disney+ continues, launching in a host of countries in Europe in late March, and in India earlier this month. Additional locations are scheduled in the weeks and months to come.
The struggle is real
The success of Disney+ is welcome news, as much of the House of Mouse has fallen on hard times. The situation caused by social distancing measures has put the company between a rock and a hard place. Disney's theme parks, hotels, and resorts across the globe are shuttered. Movie productions have screeched to a halt, cruise ships are docked, and retail stores have closed. In 2019, these business segments represented just over half of Disney's total revenue and about half its operating income.
The company's media networks segment, which includes its broadcast television and cable operations, is alive and well but has difficulties of its own. Marketing budgets have been slashed and some estimate that advertising industry revenue will fall at least 10%. Additionally, with professional sporting events on hold for the foreseeable future, ESPN stands to lose out on a significant portion of its ad revenue.
Disneyland's Cinderella Castle in happier times. Image source: Author.
All is not lost
It's important to note that Disney's television and cable businesses generated 36% of Disney's revenue last year and 50% of the company's operating profits. While the segment will no doubt take a hit, it will continue to support Disney through its current struggles.
The number of families sheltering at home no doubt contributed to the current success of Disney+, but at the bargain-basement price of $6.99 per month or $69.99 per year, viewers will likely continue to subscribe, even after the stay-at-home orders are lifted.
The current subscriber base should add about $3.5 billion to Disney's coffers over the course of a year, providing much-needed additional cash flow as its other businesses wait out the crisis. That number will continue to grow as other countries are added to the mix.
As I've argued before, Disney is a compelling opportunity for investors right now, selling for a 30% discount to its recent highs. There's no question that the company will face several tough quarters -- or even years -- but for investors with an appropriate time horizon, Disney represents a compelling opportunity at these prices. It's also worth mentioning that its dividend now yields 1.75%, and with a payout ratio of just 28%, it's highly unlikely the company will need to cut its dividend -- even in light of its current challenges.
It won't be long before theme parks re-open, cruise ships sail again, and superhero movies are back at multiplexes. Years from now, investors who bought a solid blue-chip stock like Disney at current prices will be very glad they did.
