Key Points
- As of the end of its 2020 fiscal year, Disney+, ESPN+, and Hulu had just over 120 million global subscribers.
- Theme park and product revenue fell 37% year-over-year for Disney in 2020. Studio production revenue fell 14% mostly due to closed movie theaters.
- 2020 was a tough year, but the ugliest effects of the pandemic should now be in the rearview mirror for Disney.
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Disney (DIS +1.38%) was something of an investment paradox in 2020. On the one hand, what was once its largest business segment -- "Parks, Experiences, and Products" -- turned into a massive source of red ink on its financials. But on the other hand, Disney has a massive hit on its hands with its new "Direct-to-Consumer" business. At less than a year old, Disney+ had racked up 73.7 million subscribers at the end of the company's 2020 fiscal year.
2020 was a mixed bag for the House of Mouse if there ever was one. But overall, the next five years are looking up for this media and entertainment empire, and I'm more than happy to be along for the ride.
Image source: Getty Images.
The case for Disney as a theme park and media company
Disney has a best-in-class entertainment business. The company's vertically integrated operation allows it to reach fans at multiple levels -- from screen time to play time to vacations.
Or it did, at least, up until COVID-19 blindsided it. Revenue from the parks and products segment was down 37% to $16.5 billion during Disney's fiscal 2020 (the 12 months ended October 3, 2020). With its theme parks, hotels, and cruises completely shuttered at times during the pandemic (and some of them, like Disneyland in Anaheim, Calif. still closed up for the foreseeable future), an "only"-37% decrease may come as a surprise. But most of these operations were still up and running for nearly half the year before the lockdown started in earnest in March 2020. The sale of products like toys licensed out to the likes of Hasbro (HAS 0.72%) (which, not incidentally, racks up a couple billion dollars in "partner brand" sales every year) adds to the reasons for Disney's hallmark segment not turning into an unmitigated disaster.
Also on the rocks was the "Studio Entertainment" segment, which fell 13% in fiscal 2020 to $9.64 billion in revenue -- including a 51% year-over-year tumble during the final quarter of the fiscal period. But similar to above, movie theaters were a-OK for the first six months before theaters were closed and/or most consumers lost interest in heading to their local cineplex. Disney can also generate some income here by licensing out its extensive library of movies to other media businesses.
It wasn't a total loss, but the two segments dented the most from COVID-19 combined to generate just $2.42 billion in operating profit in the last year, down 74% from 2019. The good news is that vaccines and treatments to combat the pandemic are on the way, and the worst is likely in the rearview mirror -- but it could take many years for Disney's parks to regain pre-pandemic activity levels. And a solid case could be made (one that I subscribe to) that the movie production business will never be the same.
But that brings us to Disney's position as a tech-enhanced entertainer.
The case for Disney as a streaming TV leader
The new bread-and-butter for Mickey and company, at least for the time being, is its "Media Networks" business. This too was a mixed bag: ESPN suffered as many sporting events were temporarily suspended. But overall cable (ESPN, Disney Channel, A&E, and FX, to name a few) and broadcasting (ABC) held their own. The acquisition of former rival media business Fox in March 2019 also helped, and the segment overall increased sales 14% from the previous year to $28.4 billion. An operating income increase of 21% to $9.02 billion was also the only real consistent source of profitability for Disney in the last year. Clearly, this is still a solid segment resistant to severe economic downturns.
But Disney is using its various cable, broadcasting, and entertainment assets to build something for the future: streaming TV. And thanks in no small part to blockbuster results at Disney+, streaming services sailed through 120 million subscribers during the final quarter of 2020, and are the primary reason shares are trading near all-time-highs again.
|
Disney Streaming Segment |
End of 2020 Subscriber Total |
End of 2019 Subscriber Total |
|---|---|---|
|
Disney+ |
73.7 million |
N/A |
|
ESPN+ |
10.3 million |
3.5 million |
|
Hulu |
36.6 million |
28.5 million |
Data source: Disney.
It's still early days for Disney+, too. The service is only available in a couple dozen countries as of this writing, but launches in Brazil, Mexico, Chile, Argentina, and other countries in Latin America (markets that total hundreds of millions of new potential consumers) are right around the corner. More overseas markets are planned for 2021 and beyond. And a new international general entertainment streaming service utilizing the Star brand is also being planned for the next year.
All told, the "Direct-to-Consumer" streaming business's revenue increased 81% in 2020 to $17.0 billion -- making it Disney's new number-two operating segment in terms of size and its most important driver of long-term growth.
A much larger business in five years
If theme parks and movies can mount a comeback and streaming continues to grow at a rapid pace, Disney is on track to be a much larger business in five years than it is now. The quick addition of a massive online audience that only trails Netflix (NFLX +2.60%) (which expects to surpass 200 million subscribers by the end of 2020) provides Disney a new vertical for its massive entertainment conglomerate. With a current market cap of $268 billion, this is already a mega-cap organization -- but we live in an era of trillion-dollar companies. I don't have a difficult time envisioning Disney knocking on that door as well in the not-so-distant future.
