Disney (DIS -0.45%) stock got pounded after its latest earnings report. The entertainment giant reported a loss of $4 billion in its streaming segment for the fiscal year, and missed estimates on its top and bottom lines.
However, things are suddenly looking up for Disney after the company announced the return of Bob Iger as CEO last week. Top executives as well as frontline workers cheered the move as the reorganization under former CEO Bob Chapek seemed to leave creative talent in the dark. After the stock's poor performance and complaints from executives, a consensus formed that Chapek wasn't right for the job, and Iger was brought back in.
Beyond Iger's return, however, there are other reasons to believe the worst could be over for the entertainment stock.
The ad tier is here
Disney+ is set to launch its ad-based tier on Dec. 8 in the U.S., but the company is taking a different approach from most of its streaming peers. Typically, the ad tier is made available for a lower price point than the ad-free tier, as Netflix just did with its streaming launch. Instead, Disney is offering an ad-based Disney+ version that costs the same as the $7.99/month it currently charges for the ad-free tier, and it's raising the price for the ad-free tier from to $7.99/month to $10.99/month.
Subscribers who want to stay at $7.99/month will have to accept the ad tier. With 46.4 million domestic Disney+ members, that move could result in $1.7 billion in additional annual revenue.
Similarly, the price of the Disney streaming bundle, which includes Disney+, Hulu, and ESPN+, will go up. The company is adding a new ad-free premium tier that will cost $19.99/month, while the ad-based tier will go for $12.99/month, just below the current $13.99/month price.
That move is almost certain to juice the streaming unit's financials, as the company has already proven with the success of dual tiers at Hulu. In its most recent quarter, average revenue per user at Hulu, which is made up of a mix of ad-based and ad-free tiers, was $12.23, just below its ad-free price of $12.99. That shows the ad tier brings in nearly the same revenue as the ad-free version.
The streaming business is at an inflection point
While the $4 billion in annual losses in the streaming division is ugly, management had some good news on the recent earnings call.
Now-former CEO Bob Chapek said, "Our financial results this quarter represent a turning point as we reached peak DTC operating losses, which we expect to decline going forward." Chapek said that three factors would drive that shift: the launch of the ad tier, a pullback in marketing expenses, and an optimization of its content and distribution strategy.
He also said that losses would begin to shrink in the streaming unit in the current quarter, and that the company still expected Disney+ to turn profitable by 2024. Iger, the returned CEO, seemed to double down on the bottom-line goal, saying in a letter to employees that a planned reorganization "will also focus on creating a more efficient and cost-effective structure."
Image source: Disney.
The price is right
Disney is a difficult stock to value. It's a complicated business with theme parks, consumer products, and a video entertainment division, which is divided between a highly profitable but declining traditional media segment that includes theatrical releases and broadcast and cable TV, and its fast-growing but unprofitable streaming segment.
It's clear that Disney isn't a broken company. Rather, the business is temporarily impaired due to the streaming transition, which requires an upfront marketing and content investment, and it should get a boost from the reopening of Shanghai Disneyland on Nov. 25.
Disney stock is now down roughly 50% from its peak last year, but the company should be in a much better position in a year or two thanks to the return of its widely admired CEO, the addition of the ad tier, and the inflection in its streaming business.
The company has an unrivaled brand in family entertainment, the top brand in domestic sports entertainment, and a slew of other valuable assets that should make the stock much more valuable when their full potential is unlocked. The company still needs to execute, but the opportunity is clearly there.
