Walt Disney (DIS -0.19%) stands as one of the most influential businesses in the entertainment world, and the media giant is on track to celebrate its 100th year in operation next fall. The company recently published results for its fiscal 2022 third quarter (which ended July 2), that came in significantly ahead of the market's expectations, prompting a significant jump in its stock price.
While Disney has been putting up strong performance as headwinds from the coronavirus pandemic have eased, the stock has generally seen volatile trading lately, and investors may be wondering whether it would be smart to buy on the heels of recent gains. Read on for a look at how the business is progressing and some risk factors that investors might be overlooking due to the company's strengths and impressive third-quarter results.
The media giant is posting impressive momentum
Streaming has become a central pillar of Disney's growth strategy, and the House of Mouse easily surpassed expectations for Disney+ subscriber growth in Q3. The company added 14.4 million new subscribers in the quarter to close out the period with 152.1 million members, up roughly 31% year over year and blowing past average analyst expectations for 147 million subscribers at the end of the period. The business posted wins in other key segments as well.
With pandemic-related pressures easing, revenue for Disney's parks and experiences business nearly doubled year over year to reach $6.21 billion in the third quarter. That performance also represented roughly 12% growth from the $5.55 billion in sales that the segment posted in the pre-pandemic 2019 quarter. Not only has the parks business recovered, it seems to be back in growth mode.
While theatrical distribution (film studio) revenue for the period came in far below pre-pandemic highs, sales increased roughly 343% year over year to reach $620 million. Disney's theatrical release slate has continued to be relatively light compared to pre-pandemic times, so there's still room for significant recovery as the company shifts back to releasing major movies in cinemas.
Disney's Q3 results delivered wins on multiple fronts, and overall revenue climbed 26% year over year to reach $21.5 billion and surpass the average analyst's estimate for sales of roughly $21 billion. Meanwhile, non-GAAP (adjusted) earnings per share rose 36% year over year to reach $1.09 and came in well ahead of the average analyst target for per-share earnings of $0.96 With the company posting impressive performance and its share price still down roughly 42% from the high it hit in March 2021, Disney stock could be a long-term winner at current prices. But there are still some risk factors to consider.
It's too early to call Disney a cord-cutting winner
Disney has done an admirable job of rapidly building and attracting subscribers to Disney+ streaming, and it's clear that the service is putting significant pressure on Netflix. However, Disney will also have to contend with the streaming market becoming increasingly competitive. Rivals including Warner Bros. Discovery and Paramount Global seem to be finding their footing in the space, and the most valuable geographic territories for streaming subscriptions are already fairly saturated when it comes to basic streaming adoption. On a sequential basis, Disney+ actually added just 100,000 subscribers in Q3, and weaker pricing power in many other geographic markets means overall revenue growth for the service will be harder to deliver.
While Disney undeniably has a strong content library and industry-leading production capabilities, mounting competition could limit pricing power and increase churn. Given that the House of Mouse has invested so much into Disney+ and pinned much of its future growth on the platform being a success, that presents a major risk factor -- particularly in light of other challenges facing the business.
Disney's theatrical and parks businesses are seeing strong rebounds now that pandemic-related pressures have eased, but the outlook for its linear media networks unit isn't as inspiring. Led by ESPN, the traditional television business has actually been the company's most important performance driver over the last decade, and the cord-cutting issue hasn't been solved just because Disney+ has gotten off to a strong start.
Right now, Disney gets more than $8 per month in affiliate-fee revenue for every North American household with a cable package including the channel. About 76 million households had those cable subscriptions at the end of the last fiscal year, which was down from 84 million in fiscal 2020.
Meanwhile, Disney's pared-down ESPN+ streaming offering had an average monthly paid subscription price of $4.55 in Q3 on a subscriber base of 22.8 million. Disney is also raising the price of its streaming services, creating added pressure to perform well or potentially lose subscribers. If the company isn't able to successfully bridge ESPN into the streaming space, it stands to lose substantial, high-margin revenue, and there's still plenty of uncertainty on that front.
Should you invest in this entertainment giant?
Disney stock isn't without risk factors, but it looks like a worthwhile buy at current prices. While growing in the streaming space will probably be costly and the company's traditional TV business could decline, the overall business continues to look very strong. Disney has the best collection of franchises and production studios in the entertainment industry, and synergies across its segments mean the House of Mouse is much more than the sum of its parts.