Walt Disney (DIS -0.83%) stock reached a new 52-week low of $112.69 on Thursday -- which is about the price it was three years ago, months before the launch of Disney+. The stock is now down a brutal 43% from its all-time high.
The steep sell-off raises the question: Is Disney at a tipping point? Here's what Disney needs to do to prove to investors it is a worthwhile investment.
Image source: Getty Images.
1. The streaming wars have intensified
The most recent factor driving Disney stock down is Netflix's (NFLX -0.62%) terrible quarter. If you think Disney stock has been a dud, consider that Netflix is down 75% from its all-time high.
Netflix essentially told investors that its growth is slowing. Revenue growth and earnings growth are now projected to be just 10% or so per year, which is a far cry from the 30%-plus annual revenue growth Netflix enjoyed not too long ago. Netflix's business model is dependent on producing content to keep viewers engaged, bolstering the power of its brand, and raising prices over time. Having raised prices in January 2022 to levels now 25% to 40% higher than where they were in October 2017, Netflix is pushing the limits of how high is too high of a price for its service.
The Netflix news is a red flag for Disney+, which, unlike Netflix, is not yet profitable. Disney's plan is to invest in developing Disney+, adding new content and growing its subscribers before reducing spending in fiscal 2024. It's a good plan, but it may be harder to execute if Disney's subscriber growth slows.
2. Disney+ subscriber growth is accelerating
However, there's a disconnect between the streaming service industry's headwinds and Disney's actual results. Disney will report its Q2 fiscal 2022 results on May 11. It seems like forever ago, but it was only in mid-February that Disney crushed earnings thanks to a significant rebound in park attendance and the addition of 11.8 million Disney+ subscribers, versus 7 million expected. For context, consider that Netflix lost 200,000 subscribers in its most recent quarter.
So at least for the October-through-December period of 2021, we know that Disney+ was growing nicely. However, there's uncertainty going forward for the rest of the year and the years to come. The question now is whether or not Disney+ is sustaining a fast growth rate in 2022, and whether Disney is on track to reach Disney+ profitability and reduce its streaming content spending. Those questions will probably get answered on May 11. But for now, it's worth remembering that Disney+ growth has so far exceeded even the most optimistic projections. In fact, Disney+ subscribers totaled 129.8 million as of Jan. 1, 2022, a 37% increase compared to Jan. 2 2021. By comparison, Netflix closed its most recent quarter with 221.64 million subscribers, which is less than double what Disney+ had in just around two years since its launch.
3. Disney's parks are booming
Probably the biggest misconception about Disney right now is that its parks business is still rebounding from the pandemic. Looking at its last quarter, it's clear to see that its parks segment has already rebounded, and is looking like a coiled spring for more growth. Let's not forget that Disney's Q1 fiscal 2022 generated 95% of the sales of Q1 fiscal 2020. And that per capita spending at Disney's domestic parks increased by 40% in Q1 fiscal 2022 compared to Q1 fiscal 2019. So demand is back and people are spending more money.
Like Disney+, Disney's parks are putting up an impressive performance all things considered. Disney has done nothing to indicate that there has been a slowdown in the parks business.
Even if Disney+ growth slows and Disney kicks back its target date for Disney+ profitability, Disney could still post impressive earnings growth thanks to the strength of its parks business. The secret sauce for Disney going forward is to use Disney+ merely as a lever to enhance its broader offerings as an integrated media giant. Unlike Netflix, Disney+ does not make or break Disney.
Some concerns worth keeping in mind
Disney's earnings took a hit in fiscal 2020 and fiscal 2021, but are on the rebound in fiscal 2022. If Disney's parks continue to perform and Disney+ charts a realistic path toward positive earnings (even if it takes longer), then it would stand to reason that Disney should grow to be worth a lot more than it was pre-pandemic. Disney stock could continue to face short-term volatility as investors try to determine where the business is headed. Disney is a much different company today than it was just a few years ago. If the business is showing growth, then the company can justify not paying a dividend. But if Disney's growth slows, it may call into question why the company hasn't considered reinstating its dividend.
All told, the short-to-medium-term outlook for Disney is likely to be choppy. But over the long term, Disney's brand should remain strong, its parks and movie segments will likely continue to grow, and Disney+ could eventually become a profitable segment of Disney. For investors who believe in that growth trajectory, Disney stock looks like a compelling buy now.
