The Walt Disney Company's (DIS -0.24%) recent quarter showed slight improvement, but revenue was still down 23% over the prior year and it produced a $0.39 loss per share. It wasn't a total disaster, with streaming services a winner, and the company pounced on them as its guiding light to the future. Here's why I think Disney is still a solid buy.
Traditional businesses tanked...
As expected, the parks and experiences segment seriously declined in the fourth quarter, which covered the three months ended Oct. 3. Some parks had opened already in the quarter after being closed for most of the third quarter, when sales plunged 42%, triggered by an 85% decrease in parks and experiences.
Image source: Walt Disney.
The same segment fell 61% in the fourth quarter, but there are still major snags as some parks remain closed, and those that are open face capacity restrictions and the threat of closure.
This is one of the company's major revenue drivers, typically accounting for about a third of the total. It includes theme parks, resorts, cruises, tours, and other experiences. Until all of the restrictions end, sales will remain pressured, and investors shouldn't expect any great improvement in the 2021 first quarter.
The studio entertainment segment, which covers film studios, was also down 51% in the fourth quarter. Many film crews had to delay production due to coronavirus rules, and closed theaters meant no one was going to the movies to see films scheduled for release.
Disney was definitely a COVID-19 loser. But, unlike companies that folded when money ran short, Disney was able to stay afloat through various money-saving strategies such as furloughing employees, suspending its dividend, and selling debt.
And that's not all; Disney saw skyrocketing growth in other segments.
...but the streaming era has begun
Specifically, Disney had great success with its streaming services. In 2019, the company acquired Hulu, a streaming site for general audiences offering movies, TV shows, and live TV. It also owns premium sports channel ESPN+. And a year ago, it launched its premium film site, Disney+.
Image source: Walt Disney.
Disney+ has been a savior of sorts for the company since its inception just prior to the onset of COVID-19. In one year, it has gained over 80 million subscribers who pay a monthly fee for the service. It also offers premium access for certain movies, such as a $30 fee to stream Mulan even for subscribers.
The company is going gung-ho on streaming, offering package bundles and launching new services. There are 36 million Hulu subscribers, and 4 million pay for the $65 monthly plan, which includes live TV. There are also 92 million ad-supported viewers, which is an important number because Disney also generates revenue from advertisers.
In its December 2019 investor presentation, Disney forecasted 60 million to 90 million subscribers for Disney+ by 2024. Now it's already surpassed that, and its new prediction is 230 million to 260 million subscribers by 2024.
The downside of all of this, if you can call it that, is the supersized marketing budget for the project. The company is projecting an increase in marketing from the originally forecasted $4 billion to $8 billion, but it's also planning to offset some of that with a monthly price increase for subscribers. It's forecasting profitability by 2024, which hasn't changed from the initial outlook.
It slightly raised its outlook for Hulu subscribers and more than doubled it for ESPN+,which it sees becoming profitable by 2023. It's also launching its Star+ service, which is similar to Hulu, in international locations.
Disney also owns regular television networks, including ABC and ESPN. It recently restructured its media operations to meet changing trends, so that management can direct content toward the proper channel, whether theater, streaming, or networks.
Despite the double-digit decline and loss, Disney stock is up 17% in 2020. Investors are confident in the entertainment giant's prospects, and so am I.
