Disney stock (DIS 0.09%) got positively battered this week after it released fourth-quarter earnings. Both revenue and earnings per share (EPS) came in below Wall Street's expectations, with streaming costs exploding as Disney grew its subscriber base. 

But there were lots of positive signs of progress in the quarter that investors shouldn't ignore. In particular, Disney once again took the lead in subscriber count, toppling rival Netflix. Is it winning the streaming wars? And is it worth the cost? 

Edging out the competition

The past few quarters have been a bit of a see-saw as the lead in subscriber count has swung back and forth between Netflix and Disney. Netflix may have a first-mover's edge, but Disney's unmatched content library and creative team provide it with a strong competitive advantage. 

Netflix ended the third quarter with 223.1 million subscribers, and investors breathed a sigh of relief as it increased subscriber count after it had declined for two consecutive quarters. Netflix added about 2.4 million subscriptions in the quarter.

Disney, however, added 14.6 million subscribers for a total of more than 235 million for all of its streaming networks, including 12.1 million for its flagship Disney+ channel, which ended the fourth quarter (ended Oct. 1) with a total of more than 164 million.

Disney has invested heavily in rolling out Disney+ in global regions, and in addition to core subscriptions, also offers a Disney+Hotstar bundle in certain locations.

Disney has a double whammy of content creation between films that get released in theaters and then end up on streaming networks, and straight-to-streaming content. On top of that, the company works synergistically to attract higher engagement and revenue.

For example, management has noted that audiences may be introduced to the Marvel Cinematic Universe through streaming content, and then go on to buy tickets for theater releases. Not only does Disney own the rights to many popular franchises that it uses again and again to generate revenue, but its various content outlets complement each other and work together. 

Plans for the future

Both Netflix and Disney are launching ad-supported streaming tiers at a lower price point. Netflix's has already launched, and Disney's will launch in December. In the race to capture more of the limited market share, as well as take off some pressure from content production costs, they both see this as a natural next step.

Disney boasts that it's set up to deliver a powerful advertising program since it already offers ad-supported streaming on some of its other channels, as well as decades of building up an advertising business through its traditional content outlets like the ABC television network. It anticipates a smooth rollout and a robust response to the ad tier.

Disney has lots of content coming out on its streaming networks over the next few months, including many familiar characters and series based on successful franchises. It also has several films slated for release in theaters that should be huge revenue generators in ticket sales before they land on streaming sites. It's a no-brainer model that feeds into a profitability cycle. However, it's not there yet.

Setting the stage for profitability

Disney posted $0.30 adjusted EPS in the fourth quarter, down from $0.37 last year. Profitability was dragged down by streaming costs. Management reiterated that Disney+ would become profitable in 2024, but it seems that investors were raising eyebrows at just how high costs have gotten.

While streaming revenue increased 8% to $4.9 billion, operating costs skyrocketed from $800 million to $1.5 billion. Management blamed that squarely on Disney+, with increased costs in production, programming, technology, and marketing. It also said there were no premier access films in the quarter, where subscribers pay extra for early access to streaming content, whereas there were two in the third quarter last year.

Management says this quarter was the peak of streaming operating costs. It anticipates improved operating income in the first quarter based on both a price increase for Disney+ as well as the launch of the ad tier. It expects marketing costs to decline as it focuses on "aligning our costs with our dynamic business models."

Although Disney itself has been around for a long time, the streaming business is relatively new, and it's getting into the thick of what many new businesses deal with: balancing growth and profitability. Disney has the benefit of being an established, profitable company at scale. But it needs investors to be confident and wait it out. 

Disney stock is plummeting

Disney stock fell around 13% when the earnings report came out, and it's now down more than 50% over the past year.

Disney is likely to remain a winner in the streaming wars. Aside from its insistence that it's getting closer to profitability, it has the power of its brand and its other businesses to help it stay on course. If profitability does improve in the near future, it very well may come at the expense of new subscribers, which may also disappoint investors. 

The current environment doesn't look so hospitable to stock gains. But long-term, Disney remains a stock with loads of potential.