Disney+ Caps a Year of Incredible Growth

On Nov. 12, 2019, Walt Disney (DIS -0.29%) launched Disney+: its biggest bet on the subscription video-on-demand (SVOD) market. The House of Mouse anticipated that it would take a while to scale up its flagship streaming service. In April 2019, management set a goal of growing the Disney+ user base to between 60 million and 90 million subscribers by fiscal 2024 and reaching profitability at that time.

The rising appeal of SVOD services and the COVID-19 pandemic have allowed Disney to crush those targets. On Thursday -- exactly one year after Disney+ launched -- the company provided another bullish update on its Netflix (NFLX -9.05%) competitor. The rapid growth of Disney+ could drive huge share price appreciation for Walt Disney over the next decade.

Image source: The Walt Disney Company.

Disney+ takes off like a rocket

In order to hit the ground running, Disney offered deep discounts on Disney+ subscriptions in the months leading up to the service's launch last fall. For example, in October 2019, it offered a rock-bottom price of $4.72 per month (nearly 33% off the already-low regular monthly price) for customers who committed to a three-year subscription.

As a result, by Dec. 28, 2019 -- the end of Disney's first fiscal quarter -- the service already had 26.5 million subscribers. Disney+ continued to gain traction during the fiscal second quarter, reaching 33.5 million subscribers by March 28. Furthermore, the combination of international expansion and the pandemic turbocharged its growth.

In fact, Disney+ reached 50 million subscribers by April 8, getting a boost from the company's decision to integrate its Hotstar SVOD service in India with Disney+. Growth continued at a robust pace throughout the second half of fiscal 2020, with the subscriber count reaching 73.7 million by the end of the fiscal year on Oct. 3.

Data source: Walt Disney press releases. Table by author.

The strong growth for Disney+ last quarter stood in contrast to a slowdown in subscriber growth at Netflix during the same period. Netflix's paid net subscriber additions totaled just 2.2 million last quarter, compared to 6.77 million in the prior-year period. Management attributed this to the pandemic pulling growth forward into the first half of 2020, when Netflix added nearly 26 million subscribers. Of course, Disney+ had a big advantage: It is still at the beginning of its long-term growth trajectory.

Significant growth drivers ahead

Disney+ is well positioned to continue growing rapidly over the next few years. In the near term, geographic expansion will be a key growth driver. Management noted that Disney+ is launching in Latin America on Tuesday. Additional overseas markets will come on line next year.

Looking further out, Disney+ has a huge opportunity to gain new subscribers by expanding its content library. Right now, it's a little thin, both because management didn't expect the service to attract so many subscribers in its first year and because of pandemic-related production delays. However, Disney has been able to get its studios up and running again in recent months. If the pandemic eases next year as expected, the company should be able to ramp up production further, creating content that will attract more subscribers.

The pandemic is temporary; Disney+ is not

Disney reported average revenue per user (ARPU) of $4.52 for Disney+ as of last quarter: equivalent to an annual revenue run rate of $4 billion. With the pandemic continuing and more international markets launching soon, that figure could easily jump 50%-100% during the upcoming 2021 fiscal year. That will give Disney+ a solid revenue base to support content and technology investments.

As noted above, expanding the content library should bring in new subscribers. It will also allow Disney to start raising prices, especially given how low ARPU is today. It will take a while to reach the scale of Netflix, which is on track to end 2020 with more than 200 million subscribers and annual revenue of approximately $25 billion. But Disney+ is clearly on the path toward becoming a serious Netflix competitor.

In the near term, the pandemic has crushed many other parts of Disney's business: particularly its theme parks and film studio. Combined segment profit for those businesses plunged by more than $3 billion year over year last quarter. However, there's no reason to expect the pandemic to have a long-term negative impact on the media giant's parks business. And while moviegoing habits may change, Disney's big-budget blockbusters are likely to pull in big audiences again after the pandemic ends.

In short, most of the disruption to Disney's legacy businesses is temporary. By contrast, the accelerated growth of Disney+ this year dramatically improves the long-term prospects of that service. With Disney stock still trading about 10% below the all-time high reached late last year, Disney might be an even better bet on the growth of streaming than Netflix stock.