Earlier this week, Walt Disney (NYSE:DIS) reported a $4.7 billion net loss under generally accepted accounting principles (GAAP) for the third quarter of fiscal 2020. Excluding special items, earnings per share plunged 94% year over year to just $0.08.
Despite the huge negative impact of the COVID-19 pandemic on Disney's results, the third quarter should be considered a success for the House of Mouse. That's because the pandemic has helped the global media titan accelerate the already-rapid growth of its direct-to-consumer streaming initiatives, putting it on a path to rival Netflix (NASDAQ:NFLX) in the streaming arena. Let's take a look.
New streaming milestones
Disney's direct-to-consumer efforts reached a major milestone last quarter. The company surpassed 100 million subscribers across all of its streaming services, ending the period with 101.5 million subscribers across its Disney+, Hulu, and ESPN+ services.
Disney+ now represents an outright majority of that total, with 57.5 million subscribers as of June 27. That came up a little short of the average analyst estimate of 59.4 million. However, it's an amazing achievement nonetheless. A quarter earlier, Disney+ had 33.5 million subscribers. A year ago, it didn't even exist. And while growth is moderating, the service still has plenty of momentum. As of Aug. 3, Disney+ had 60.5 million paid subscribers. For reference, Disney's initial goal for Disney+ was to grow the subscriber base to between 60 million and 90 million by 2024. Clearly, it's way ahead of schedule.
Hulu and ESPN+ are also growing nicely. Hulu had 35.5 million subscribers by the end of last quarter, consisting of 32.1 million subscription-video-on-demand (SVOD) customers and 3.4 million who added on a live TV package. Hulu's subscriber total was up 11% sequentially and 27% year over year.
Lastly, ESPN+ ended the period with 8.5 million subscribers, up from just 2.4 million a year earlier. Like Disney+, ESPN+ has already surpassed the low end of the 2024 target range that management set out just last year.
Average pricing for ESPN+ and Hulu's SVOD-only offering declined by double digits on a year-over-year basis. That shouldn't concern investors, though, as it mainly reflects Disney's success in convincing customers to sign up for a discounted bundle of all three services.
Plenty of streaming growth ahead
The faster-than-expected growth of Disney's direct-to-consumer business should give investors comfort that the company will be able to navigate the transition to a new streaming-first business model with ease. Based on Disney's quarter-end streaming subscriber total and average monthly revenue per subscriber, the company's streaming business has already reached an $8 billion annual revenue run rate. Netflix didn't reach $8 billion in annual revenue until 2016.
Furthermore, Disney is just getting started in streaming. Even Hulu (its most mature service) is growing quickly. Disney+ is still in its infancy and hasn't even launched in many major markets yet. Finally, Disney's management announced this week that the company will launch yet another streaming service in international markets next year: a "general entertainment offering under the Star brand."
In addition to having massive opportunities to expand its streaming subscriber base, Disney will be able to boost prices over time. Launching Disney+ with a price well below Netflix -- and offering additional discounts -- was a savvy move that has enabled the service to gain a huge subscriber base despite what is still a limited content offering. As Disney+ builds out its library over the next five years, it wouldn't be surprising if Disney manages to double its average monthly revenue per user (currently $4.62).
Disney stock still looks attractive
The closure of movie theaters and theme parks weighed heavily on Disney's earnings last quarter, and that headwind is likely to continue for at least a few more quarters. However, looking out a few years, the company's film studio, theme parks, and related merchandising businesses are likely to return to churning out massive profits. And despite the decline of cable TV, Disney should be able to squeeze big profits out of its media networks business for many more years.
These parts of the business generated nearly $17 billion of segment operating income last year, with plenty of room for growth, thanks to the acquisition of Fox. Even without factoring in Disney's streaming efforts, it wouldn't be hard to justify the company's enterprise value of roughly $275 billion.
On top of that, Disney now has a streaming business that is growing by leaps and bounds and is on track to be the next Netflix -- and should be valued as such. For reference, Netflix has an enterprise value of $230 billion. Thus, as Disney's streaming offerings mature over the next few years, it should unlock massive upside for Walt Disney stock.