Walt Disney (DIS 1.54%) stock is down 30% year to date, down over 45% from its all-time high set in March 2021, and is roughly the same price now as it was five years ago. Yet, in the last five years, Disney recorded its highest annual profit in company history (fiscal 2018) and its highest revenue in company history (fiscal 2019), and its business is in much better shape today than it was in 2020 or 2021.
Aside from panic-selling Disney stock, the worst mistake Disney investors can make right now is evaluating Disney+ similarly to other streaming services. Here's a better way to think about Disney+ and why the service is evolving into a gateway that propels customers toward bigger-ticket Disney products and experiences.
Image source: Getty Images.
Disney is built differently
Disney's bundle of streaming offerings (Disney+, ESPN+, and Hulu) is often compared to other streaming services -- namely, Netflix (NFLX 4.17%), Apple (AAPL 0.64%) TV, Amazon (AMZN 1.30%) Prime Video, AT&T's (T 1.17%) HBO Max, Peacock, and Paramount+. But Disney is in a league of its own. And it starts from the customer engagement arc that Disney can take with any single person or family. Put another way, Disney has much more upside.
To illustrate this point, let's think of the best-case scenario for a satisfied Netflix subscriber. Maybe they tell their friends about the service, upgrade to Netflix's $19.99-per-month premium subscription tier, and are willing to accept future price hikes. Comparable upside applies to the other streaming services. Apple TV has limited overlap with Apple Music and Apple Podcasts. And Amazon Prime Video is somewhat connected with renting or buying movies on Amazon. But in general, these competing streaming services don't lead to follow-up purchases.
By comparison, Disney has many more touch points along the media value chain by which it can engage and profit from customers. And it all starts with Disney+. On its own, Disney+ is just $7.99 per month. It acts as a lead-generation tool that allows Disney to increase customer engagement. Here's how it works.
Disney's sales funnel
If you're familiar with marketing or lead generation, you've probably seen a version of the marketing and sales funnel. It's a model that applies to most businesses.
At the top is awareness, then it trickles down to interest, consideration, intent, evaluation, and finally, purchase. There are two objectives. The first is to bypass objections and friction to facilitate passage from stage to stage. The second is to grow the size of the funnel.
In my opinion, I believe Disney has a similar sales funnel with the all-important advantage that it makes money along the way and doesn't rely on a single catch-all outcome. Disney's end goal is to compel customers to visit a Disney park because they are a major revenue source and one of Disney's highest-operating-margin segments (typically 15% to 25%).
Again, this is my own interpretation. But I think the following visual illustrates the bigger picture of Disney+ and how it fits into the overall business.
Graphic by author.
Disney+ offers an easily accessible way to engage with hundreds of millions of consumers, archive content, introduce new content, expand storylines, and ultimately increase the chance that a customer sees a Disney movie, attends a Disney performance, goes to a Disney store, or buys some sort of licensed Disney product, etc.
Ultra-satisfied customers may be inclined to book a trip with Adventures by Disney, a vacation planning company that provides family packages for domestic and international travel. Or they might take a voyage on one of Disney's five cruise ships. Or maybe they will even go to one of Disney's six resorts. The funnel isn't necessarily in order of price and has a lot of variance to it -- a multi-day stay at a Disney World hotel with Park Hopper will cost loads more than a one-day visit. But the general idea is that Disney wants to convert its customers from behind the screen to an in-person experience.
Tying it all together
Disney's direct-to-consumer (DTC) segment, of which Disney+ is a major part, lost $1.4 billion in the first half of Disney's fiscal 2022. However, Disney+ is expected to be profitable by fiscal 2024. Uncertainty surrounding the DTC segment's long-term profitability, along with inflation and a potential recession, are some of the biggest reasons why Disney stock is struggling right now.
Investors should hold Disney accountable for making Disney+ profitable and keeping it profitable. But Disney+ doesn't need the same profit margins as Netflix or any other streaming service. You could even argue that if Disney+ simply broke even, it would be a huge success.
It's hard to quantify the role that Disney+ plays in parks and experiences attendance. But the potential impact of Disney+ on a single person or family is undeniably larger than any other streaming service. If Disney+ helps persuade a family to go to Disney World or take a cruise, that could be a $10,000-plus vacation. It would take decades for Netflix or another service to make that much revenue from a single family.
In its second-quarter fiscal 2022 earnings call, Disney reaffirmed guidance that it expects Disney+ subscribers to reach 230 million to 260 million by fiscal 2024. That is a massive pool of people that are engaging more with Disney. Disney+ plans to roll out an ad-supported tier domestically by the end of 2022 and internationally in 2023 -- which has been met with some opposition from investors who believe subscribers will simply save money and downgrade to the ad-supported tier. But I would argue that Disney should do everything it can to get subscribers in the door because each subscriber expands its "sales funnel" and enhances Disney's brand.
Wall Street is undervaluing the role that Disney+ plays in the company's broader media suite. Retail investors would be wise not to make the same blunder. With the stock down 45% from its all-time high, Disney offers a compelling risk-reward for long-term investors.
