Walt Disney (DIS 0.42%) stock is down nearly 50% from its all-time high despite blowing Disney+ subscriber estimates out of the water and seeing a rebound in its domestic parks. For its fiscal 2022 second quarter, Disney was expected to add roughly five million Disney+ subscribers, but it actually added 7.9 million. However, it also missed earnings estimates as high spending hurt the bottom line. 

Despite the earnings miss, Disney+ has continued to grow at a faster pace than anyone could have ever hoped for. For the longest time, subscriber growth was all that was needed to pole-vault streaming stocks like Netflix to new heights. That paradigm seems to have changed as investors are now concerned with the long-term profitability of the increasingly saturated streaming industry.

Here's why Disney's numbers weren't as good as they seemed, and why that is a red flag for investors.

A man pinches the ridge of his nose in agony while sitting at an office desk.

Image source: Getty Images.

Not all subscribers are created equal

Disney breaks its subscriber figures into three categories.

Category

Q2 Fiscal 2022

Q1 Fiscal 2022

Change

Disney+ Domestic (U.S. and Canada)

44.4 million

42.9 million

1.5 million

Disney+ International (excluding Disney+ Hotstar)

43.2 million

41.1 million

2.1 million

Disney+ Hotstar

50.1 million

45.9 million

4.2 million

Data source: Walt Disney. 

Domestic Disney+ and international Disney+ are self-explanatory, but it's Disney+ Hotstar that folks may be unfamiliar with.

Disney acquired 21st Century Fox in 2019. Fox owned Star India, a media company based in that region. In 2020, Disney capitalized on this asset and launched Disney+ Hotstar as a separate streaming service that is mainly focused on Southeast Asia. Disney+ Hotstar features similar content to Disney+, but it also has local programming and licenses content from other companies. All told, Disney doesn't make as much money from a Disney+ Hotstar subscriber as it does from a domestic or regular international Disney+ subscriber. In fact, the results may shock you.

Not so hot numbers

Disney makes roughly the same amount of revenue per paid domestic or international subscriber (excluding Disney+ Hotstar). But each Disney+ Hotstar subscriber brought in just $0.76 per month of revenue in the fiscal second quarter compared to a $6.33 average for the other segments.

 

Q2 Fiscal 2022 Average Monthly Revenue Per Paid Subscriber

Disney+ Domestic (U.S. and Canada)

$6.32

Disney+ International (excluding Disney+ Hotstar)

$6.35

Total Disney+ (excluding Disney+ Hotstar)

$6.33

Disney+ Hotstar

$0.76

Global Disney+

$4.35

Data source: Walt Disney. 

Put another way, every eight or so Disney+ Hotstar subscribers is worth just one normal Disney+ subscriber. Seeing as 4.2 million of Disney's 7.9 million subscriber additions for the quarter were from Disney+ Hotstar, the subscriber growth is far less impressive than it looks on the surface. What's more, Disney+ Hotstar subscribers are now the largest category of total Disney+ subscribers.

Since the company makes so much less money from a Disney+ Hotstar subscriber, its total streaming numbers are somewhat worthless. Rather, all that matters is the revenue per subscriber. Disney+ Hotstar is effectively diluting the global Disney+ revenue per subscriber, which was a paltry $4.35. It is going to be very hard for Disney to make its streaming service profitable if it is spending billions on original content and only making $4.35 per paid subscriber.

Where to go from here

In the latest quarter, Disney booked an $887 million operating loss from its direct-to-consumer business segment, which partially offset the $2.82 billion in operating profit it generated from its linear networks. The biggest long-term red flag for Disney is if the company grows its direct-to-consumer business in a way that cannibalizes linear networks and leads to negative growth -- ultimately shrinking Disney's media and entertainment distribution revenue and profit.

There's no sugarcoating it -- this is a bad look for Disney. And in many ways, Disney stock deserves to be under pressure until the company proves it can successfully monetize its direct-to-consumer business. However, Disney's track record for vertically integrating multiple media forms under one powerhouse business is also unparalleled. Its original content production, both in terms of blockbuster hits and shows, enhances its overall brand. The fact Disney stock is down about 50% from its all-time high and trades at a forward price-to-earnings ratio of 25, even though Disney+ is losing money, seems to indicate the stock has an attractive valuation.

No matter how you slice it, it's hard to imagine Disney being a smaller company 10 years from now than it is today. So for long-term investors, scooping up a couple of shares of Disney seems like a balanced move.