With U.S. inflation remaining stubbornly high and federal interest rates expected to climb above 5% in 2023, much of the market is feeling the drag. The S&P 500 (SNPINDEX: ^GSPC) is down 20% since the start of 2022, but entertainment stocks in particular are having a tough time. Netflix has dropped 51% this year, while Warner Bros. Discovery has fallen some 47% over the same period. Walt Disney (DIS 0.18%) has performed better, but it has still seen a dip of 33%.
Disney distinguishes itself from its streaming competitors by owning and operating experiential businesses such as Disney Parks and Disney Cruise Line. However, because the company is such a consumer-focused corporation, many investors may ask if Disney stock is worth purchasing right now, especially with household budgets under strain. Let's break it down.
Disney's streaming business continues to grow
Walt Disney's entry to the streaming space started in earnest when it purchased a 27% stake in Hulu in 2009. In the years since, Disney has launched ESPN+ and Disney+. Walt Disney also owns India-centric streaming service Disney+ Hotstar, and has increased its stake in Hulu to 66%, with plans to take full control by the end of 2024.
Disney has just over 221 million streaming customers around the world, placing it just behind global leader Netflix, which has 223 million subscribers. However, some industry analysts expect Disney+ alone will reach 284.2 million subscribers around the world by 2026, with Netflix falling down the rankings at 270.7 million.
Disney+ is rolling out an ad tier
Disney will soon roll out a Disney+ ad-supported tier, ostensibly aimed at attracting new customers.
The $7.99-a-month Disney+ Basic (With Ads) service arrives on Dec. 8, 2022, offering full access to its library of shows and movies, with approximately four to five minutes of commercials for each hour of content. Additionally, no ads will run against programming aimed at children, and users get the same capabilities of other plans, with support for 4K. The keen-eyed may note that the price is the same as the current Disney+ Basic plan, but that tier is increasing to $10.99 per month when Disney+ Basic (With Ads) lands.
Netflix is launching an ad tier of its own on Nov. 3, 2022, priced lower at $6.99 a month. The similarly named Basic with Ads also features four to five minutes of ads for each hour of programming, and kids' content will also be free of commercials. But unlike the entry-level Disney+ plan, Netflix's Basic with Ads will not feature the company's full catalog, and viewing is capped at a single 720 HD stream.
While it's likely both Disney+ and Netflix will find success with their respective ad tiers, some experts believe Walt Disney will come out on top. MoffettNathanson analyst Michael Nathanson suggests Walt Disney's advertising infrastructure -- a byproduct of it owning several linear TV networks -- and consumer "affinity for Disney content" are key factors. Nathanson ultimately expects Disney+ Basic (With Ads) could generate $1.8 billion in revenue in the U.S. by 2025, while Netflix will land at around $1.2 billion.
Disney's parks business is robust
Following lengthy COVID-19 lockdowns, Disney was able to reopen many of its parks around the world this year, and Disney fans have come hurrying back. In its fiscal 2022 third-quarter earnings, the company reported domestic hotel bookings hit 90% occupancy, and it anticipates it will see pre-pandemic levels in the coming months. Disney also saw a rise in park spending during Q3, with per-customer up 40% when compared with the same period in 2019.
Some have suggested the spike in activity at Walt Disney's parks is because of a backlog of visitors who could not enjoy the company's attractions over the worst months of the pandemic. That may be true, but Walt Disney CEO Bob Chapek has suggested otherwise. While he acknowledged the "pent-up demand" on the Q3 earnings call, he ultimately asserts that "what ... [Disney is] seeing is far more resilient, far more long lasting."
Walt Disney's success in acquiring streaming subscribers and park visitors this year suggests the corporation is well-positioned to weather this difficult economic period. If circumstances worsen and the United States enters a recession in 2023, as some expect, Disney's stock would still be a good long-term investment.
The company's rising subscriber base attests to the strength of its content portfolio, and the new Disney+ ad-supported tier allows Walt Disney to hike rates efficiently while reducing churn. Furthermore, with Walt Disney parks and hotels showing their ability to recover quickly, investors should be confident in the company's long-term prospects.
