Walt Disney (NYSE:DIS) management showed its experience and flexibility during the pandemic with a pivot in its business strategy to accelerate the rollout of its streaming television offerings. Investors cheered the success of Disney+ in particular, as it exceeded 100 million subscribers earlier this year, only about 16 months after its launch.
In its second-quarter 2021 earnings release, the company announced a total of 103.6 million Disney+ subscribers as of April 3, and investors were disappointed that the pace of growth had begun to slow. The result was a 5% drop in the share price in the days following the announcement. But investors focused on the streaming data figure missed a more important one that provided an opportunity to invest in a company with an iconic brand and plenty of upside potential.
The focus on Disney's plans for its Disney+, Hulu, and ESPN+ streaming offerings was understandable during the pandemic. And progress in that segment will remain important. But in the second-quarter conference call, CEO Bob Chapek gave investors some information that has a more relevant impact on how the business will recover compared to pre-pandemic levels.
Chapek's comments indicated there will be upside from the company's parks, experiences, and products segment beyond pre-pandemic levels once the full recovery takes hold. He told investors, "We've taken advantage of the opportunity to make improvements to our operating procedures to enhance the guest experience through the use of technology innovations, new ticketing strategies, and other offerings."
The company most recently reopened its Disneyland park in Anaheim, California, but the rebound is already being felt on an international level. Chapek told investors that its Shanghai resort is currently operating at or above fiscal-year 2019 levels. He also said the company is "encouraged by what we're seeing at Hong Kong Disneyland." And with Disney's Paris park yet to reopen, there's more room for the rebound to accelerate.
An impactful segment
While many investors might have been unhappy with the lower pace of growth in the direct-to-consumer offerings, it seems that the news for the parks segment was somewhat overlooked. Disney's streaming business is increasingly important, especially as it relates to the film studio business overall. But people might be forgetting how big the theme park business was prior to the pandemic.
The parks segment contributed 38% of revenue for the fiscal year ended Sept. 28, 2019. As a recovery from the pandemic began to take hold in late 2020 and early 2021, the segment represented 21% of total revenue for the six months ended April 3, 2021.
As reopening progresses, and with pent-up demand (as witnessed with the Shanghai park), the company looks to have a significant catalyst from here. The results from the most recent earnings period were just at the beginning of a resurgence in consumer activity. There wasn't even an approved vaccine for adolescents at the time, while there is now. And domestic air travel is still only at about 60% of comparable 2019 levels. That's been steadily improving, but there is still much more of an increase ahead. And Disney parks are undoubtedly going to remain a favored destination for family vacations.
Disney's stock has since recovered from the post-earnings hit it took. But while the S&P 500 has returned almost 12% year to date, Disney shares are still in the red this year.
Considering the likely boon coming from vacationers returning to Disney theme parks globally, and the other areas of a recovery (like sports and movies) that the company will benefit from, the rebound in business has only just begun.
Focusing on the relatively new streaming services makes sense. That will be a growth segment for the company for some time to come. But investors seemed to miss the obvious in the earnings report, and it's not too late to invest ahead of when the benefits from a return to theme parks will be fully realized.