Disney's (DIS 4.17%) most recent earnings report demonstrated a sustained recovery from the pandemic. The world's largest entertainment company is feeling the impact of COVID-19 along with most of its peers as it deals with limited capacity and continued closures in certain regions. But Disney parks are still happy places to be, and vacationers have been showing a tremendous desire to get back to the magical moments of a Disney vacation.
Between returning visitors and a successful streaming start-up, Disney's getting back in action. But despite the rebound, not everything is magical in Disney's kingdom. Let's check it out from both angles.
Green flag: Disney+ is right on schedule
When the company launched Disney+ just over two years ago, it was the biggest change to its business model in years. Disney had acquired Hulu not too long before, but that was and remains a smaller outfit. Disney+ was ambitious with the goal of reaching more than 250 million subscribers in about five years.
Since its launch, subscriber growth has been right on schedule. That doesn't mean it's gone completely in line with expectations every quarter, but with some bumps along the way, new members are joining as predicted. At the close of the second quarter (ended April 2), there were nearly 138 million subscriptions, including 7.9 million new ones. Including Hulu and ESPN+, there were 205 million total subscribers.
Management is devoting a staggering $32 billion in content creation in 2022. You won't actually see a lot of that material. it's in the process of developing 500 pieces of content for local markets abroad with 180 of those set to be released in 2022. It's also planning to launch in 53 new international markets by the end of the year, which should significantly boost subscriber count. Disney+ is demonstrating its highest growth rates internationally, where subscriptions increased 39% over last year in the first quarter versus 19% in the U.S. and Canada. International revenue per subscriber increased 24% (excluding the Disney+Hotstar bundle) versus 5% in the domestic channel.
The company is also planning to launch an ad-supported version of Disney+, which should further boost subscriber count while increasing revenue.
Red flag: Disney+ is draining profits
The Disney+ rollout has been an outstanding success, in some part aided by lockdown rules going into effect just weeks after the initial launch. But it's taking a lot of money to make it happen, and it's going to take a lot more. The $32 billion in content spending this year will take its toll on the company's bottom line, which was $2 billion in 2021, even if it's amortized.
In the second quarter, revenue from Disney's direct-to-consumer unit increased 23% to $4.9 billion; however, the operating loss grew more than threefold to $887 million from the year-ago period. Management attributed the increase to "higher programming and production, marketing and technology costs."
CEO Bob Chapek said that the company was well-positioned to raise prices at the right time, and between paid subscriptions and the new ad-supported tier, Disney+ is on track to become profitable by 2024, in accordance with its original timeline. He said, "We believe that great content is going to drive our subs, and those subs then in scale will drive our profitability." That's the way it's supposed to work in most start-ups.
Disney also has a few tricks up its sleeve that could alleviate some of the profit drain. One is to recoup the cost of its content that's shown in theaters through ticket sales. By the time it lands on Disney+, it's already profitable. Marvel Studio's Doctor Strange in the Multiverse of Madness, for example, is the top-grossing film of 2022 so far with nearly $1 billion in ticket sales since its release in May. At least a portion of subscribers are looking for theater hits. The company has also in the past charged viewers extra for early viewing of new releases.
You can't go wrong with Disney stock
You can't go wrong with Disney stock, as long as you're focused on the long term. Short term, the company is under plenty of pressure, given park closures, content build, inflation, and rising costs. Long term, however, it's hard to paint a picture that doesn't include increasing revenue and profits. That's why Disney is a top blue chip stock.
