Despite the market's slump this year, Walt Disney (DIS -1.47%) seemed poised to thrive coming into 2022. The economic reopening has led to a boom in travel demand, supporting Disney's theme parks, while its streaming business has seen strong subscriber growth since it launched Disney+ three years ago.
However, the stock has flopped this year -- down nearly 40% year to date -- and the fiscal fourth-quarter earnings report released Tuesday after hours delivered another disappointment for investors.
The entertainment giant missed analyst estimates by wide margins on both the top and bottom lines. Revenue in the quarter grew just 9% to $20.15 billion, below estimates at $21.36 billion. Adjusted earnings per share, meanwhile, actually declined from $0.37 to $0.30 as its streaming segment loss widened significantly, well below the consensus at $0.57.
As an entertainment conglomerate, Disney is a complex business, and no single segment determines its overall performance. Though its theme parks performed strongly in the quarter, the rest of the business was weak. The direct-to-consumer (DTC) segment, in particular, appears to be the culprit for the miss and the stock's 7% fall in after-hours trading.
Image source: Disney.
A streaming miss
Disney's DTC segment -- which includes streaming properties like Disney+, ESPN+, Hulu, and Hotstar -- reported an operating loss of $1.47 billion compared to $630 million. While you might think the widening loss was justified by fast growth in the DTC business, that wasn't the case.
Revenue in the segment increased just 8% to $4.9 billion. Presumably, growth was at least a few points higher in constant currency as the dollar has strengthened significantly over the last year, but the company didn't break out constant-currency results.
Disney+ saw solid growth in the quarter, adding 1.9 million subscribers in the quarter and 7.3 million internationally (excluding Disney+ Hotstar), but average revenue per user from Disney+ domestic subscribers fell 10% year over year to $6.10 as its bundle, which includes Hulu and ESPN+ for $13.99/month, seemed to draw new subscribers.
Disney restructured its business to make streaming the focus of its video entertainment division. However, the fourth-quarter results are hardly inspiring, showing its loss in streaming expanded by nearly $1 billion with just single-digit revenue growth. Additionally, the growth of streaming is cannibalizing the highly profitable linear TV business, though Disney has been forced to jump into the streaming fray because of the success of competitors like Netflix.
Change is coming
Despite the weak performance, management was optimistic that the company would still hit its target of profitability in the streaming segment by fiscal 2024.
On the earnings call, Bob Chapek cited three factors that would erase the $4 billion operating loss in DTC for the year. First, the company's planned launch of its ad-based tier on Disney+ will give the bottom line a jolt. Unlike Netflix, Disney isn't offering a lower price for the ad-based tier, but adding ads to the $7.99 Disney+ membership and offering an ad-free tier for $10.99/month.
Additionally, the company plans to rein in its marketing spending and optimize its content and distribution approach. Management also said that losses in the segment have now peaked, and it expects them to start narrowing in the current quarter.
Is it time to sell the stock?
There's no question that Disney's performance as a stock and as a company has been disappointing this year, but the company's transition to streaming was never going to be quick, and management had originally targeted profitability by 2024. If you back out the $1.5 billion operating loss from streaming in the quarter, Disney's overall segment operating profits would have doubled, showing how much of a drag streaming has been.
Meanwhile, the theme parks business is delivering impressive results. The parks, experiences, and products segment saw operating income more than double to $1.5 billion -- and that's with the Shanghai park being closed.
Despite the weak results, the entertainment stock could be about to hit an inflection point as it launches the ad-based streaming tier. The company still has a wealth of intellectual property that gives it a competitive advantage, and the streaming business could be profitable in just a few years.
Selling now, with losses expected to narrow and the streaming business not having a chance to prove itself yet, could be a big mistake.
