Disney (DIS 1.59%) recently closed out what has been perhaps its most challenging quarter ever. The impacts of COVID-19 were felt in every segment of its operations. However, the effects were not all negative. Nevertheless, the company is relieved to put what is hopefully the worst of the pandemic behind it.
In the current phase of the outbreak, The House of Mouse was able to reopen some of its parks and restart some content production. Let's take a closer look at the state of its parks and streaming services in the second half of 2020.
Parks are opening but not at full capacity
The coronavirus pandemic hurt the company in a variety of ways, but perhaps none was worse than having to shut down its theme parks. Wrapped up into its parks, experiences, and products division, that segment contributed 38% of revenue in fiscal 2019, but its share of the top line has declined to 27% this year. Park closures resulted in an adverse impact of $3.5 billion on operating income for the segment during the quarter.
Worse, the reopening of Walt Disney World in Florida is not going as well as management expected. A resurgence of coronavirus cases in the region is causing people to worry about venturing out, leading to lower attendance at the park. The fate of these theme parks relies heavily on how safe people feel, and it's unlikely that the business will go back to pre-pandemic levels of attendance until there is an effective remedy to the virus.
Still, Disney does not need the parks to be at full throttle to benefit from reopenings. Discussing profitability for Disney World at reduced capacity, CFO Christine McCarthy said, "Right now, it's not as high as we had expected, but we're still in the net positive contribution level." The company has begun a phased reopening of its parks in Shanghai, Paris, Tokyo, and Orlando.
Disney+ and Hulu have come to the rescue during the pandemic
The one bright spot for the company during the pandemic has been the performance of its direct-to-consumer streaming services, which have combined to reach over 100 million paying subscribers.
As of its latest update on Aug. 4, Disney+ has 60.5 million subscribers. The company isn't finished expanding internationally -- Disney+ will be available in the Nordics, Belgium, Luxembourg, Portugal, Indonesia, and Latin America by November. To give you an idea of the opportunity in those markets, Netflix had 36 million subscribers in Latin America at the end of its second quarter, and the population of Indonesia is 275 million.
Additionally, the company announced during the third-quarter earnings call that it will release the potential blockbuster film Mulan directly to its Disney+ platform on Sept. 4. Subscribers will be able to purchase the film for $29.99. The company expects the offering to attract new members to the service as well as generate revenue. The release of Mulan, as well as the second season of the popular series The Mandalorian, should attract and help retain subscribers in the second half of the year.
Hulu has 35.5 million paying viewers, up from 32.1 million in the previous quarter and 27.9 million in the prior-year period. Importantly, the average revenue per user is much higher for Hulu ($11.39) than it is for Disney+ ($4.62). Hulu is gaining traction, in part because of the surge in demand for in-home entertainment during the pandemic and partly because Disney offers the service to U.S. customers in a bundle with Disney+ and ESPN+ for $12.99 per month.
The company's streaming services are not yet profitable, but the robust subscriber growth led management to commit to a new streaming offering that will roll out internationally in fiscal 2021.
What this means for investors
Disney is among the many companies reeling from the fallout of the pandemic. The House of Mouse is not likely to be at full strength until there is a vaccine or other treatment for the novel coronavirus. However, it can continue to build out its streaming offerings, control costs, and responsibly allow visitors at its parks to the extent permitted by local governments.
Netflix, a pure-play streaming company, is trading at 68 times forward earnings. Before the onset of the pandemic, Disney was regularly selling at a forward P/E of around 25. As Disney continues to build out its streaming services, and they become a larger portion of the business, its possible the stock's valuation will climb closer to that of Netflix. If you have a long-term investment horizon, then Disney stock is a buy at current prices.