Disney Crushed Earnings, but Is the Magic Gone?

Who knew Moana's line "no one knows, how far it goes" would prove painfully prophetic as to the extent of Disney's (DIS -0.58%) price hikes?

For the quarter ended Jan. 1, 2022, which for Disney is Q1 fiscal year 2022 (FY22), per-capita spending at Disney's domestic parks was up more than 40% compared to Q1 FY19. Park attendees may be grumbling about prices, but shareholders of this blue-chip stock certainly don't mind.

Disney's stock price rose as much as 7% on Thursday thanks to better-than-expected park performance and 11.8 million new Disney+ subscribers, compared to 7 million expected.

Let's look at the highlights from Disney's quarter and some of its upcoming attractions, as well as discuss whether Disney's profit-driven tactics have gone too far and risk tarnishing its brand.

A blowout quarter

Disney beat Wall Street estimates on revenue, diluted earnings per share (EPS), and Disney+ subscriber adds. Total Disney+ subscribers now stand at 129.8 million.

Data source: The Walt Disney Company. YOY = Year over year. 

For context, Netflix finished 2021 with 222 million subscribers after adding 8.3 million net subscribers in its Q4 2021. However, it expects to add just 2.5 million subscribers in Q1 2022. A little over two years into its launch, it is undeniably impressive that Disney+ is now growing faster than Netflix and has 58% as many subscribers. 

Aside from Disney+ growth, the standout from Disney's quarter was the monster rebound in its park revenue and profit.

Data source: The Walt Disney Company. 

Just a year after Disney reported negative operating income from its Parks, Experiences, and Products segment, it posted its highest operating margin in five years and 95% as much revenue as the pre-pandemic holiday quarter.

"Per-capita spending at our domestic parks was up more than 40% versus fiscal first quarter 2019, driven by a more favorable guest and ticket mix; higher food, beverage, and merchandise spending; and contributions from Genie+ and Lightning Lane," said Disney CFO Christine McCarthy during the company's earnings call.

Disney is known to habitually raise prices -- and its customers will pay up anyway. Due to inflationary pressures and a brutal 2020, it's understandable that Disney would raise prices even more than expected and implement several additional profit-driven tactics like Genie+ (which replaced FastPass+) and Lightning Lane (shorter lines for a fee at premium rides).

Upcoming attractions

Over the medium term, it seems that customers will probably continue to shrug off Disney's price hikes. The company is doing an excellent job improving offerings on both Disney+ and at the parks. On Disney+, The Book of Boba Fett and Encanto have both been huge successes. On Wednesday, Disney announced the release date of May 25, 2022, for the first episode of the highly anticipated Obi-Wan Kenobi series. 

As far as park offerings go, updates to the highly popular Tron Lightcycle Run ride began in January 2022. The immersive two-night experience on the Star Wars: Galactic Starcruiser opens for business on March 1, 2022. Guardians of the Galaxy: Cosmic Rewind opens this summer at EPCOT. Love it or hate it, Disney is doing its part to justify higher prices at its parks by investing in making the parks better.

Disney is a business built on storytelling and experiences. Its value adds are grounded in emotion and lasting memories that give Disney incredible pricing power, not just with new rides and movies, but with the universes that those experiences live in and the merchandise that comes with it. Since Disney is expanding upon those universes, growing its content, and making its parks more thrilling and immersive, it stands to reason that folks will find value in what Disney is doing and accept higher prices.

Has Disney crossed the line?

So, have Disney's penny-pinching practices gone too far? Is the company exhibiting insatiable greed, taking advantage of people who just miss going to Disney parks? Probably not -- at least not yet. But investors should keep an eye on management's profit motives to make sure that they don't cross the line and negatively impact Disney's brand in the long run.

Backlash against Disney CEO Bob Chapek, who replaced Bob Iger about two years ago, is strong. Some argue that Walt Disney would be turning over in his grave if he were to see his company's priority shift from imagination to profit.

However, as my writing colleague Rick Munarriz argues, long lines at Disney parks indicate that demand is outpacing supply. And for that reason, Disney could raise prices even further. It would up the cost, but it would also improve the experience at the parks. In the process, however, it would also make going to Disney parks even more unaffordable for the middle class, which goes against the vision that Walt Disney wanted.

Disney isn't at a crossroads. The magic isn't gone. But I would submit a word of caution toward investors who are celebrating Disney's blowout quarter: Keep your eyes and ears open to the attitudes of Disney customers toward management's strategies. Reading Disney blogs, subreddits, or viewing Instagram pages can be a Peter Lynch-style grassroots approach to monitoring Disney's customer satisfaction.

Similarly, listen to the Disney earnings calls. You'll learn a lot more from executives' tones and responses to questions than you will simply by reading the transcript.

I have my concerns, but Disney remains my top stock to buy for 2022 because the business is rebounding, profits are coming back, and Disney+ continues to crush expectations.