Shares of Disney (DIS +0.11%) have declined 39.5% over the past year as investors have lost faith that the company will ever turn a significant profit in the streaming business. But that may be a short-sighted way to look at Disney's performance in 2022.
Investors who have a long-term time horizon can look past a quarter or year of losses to the opportunity Disney is trying to unlock in streaming. Here's a look at where the company will likely be in five years and why I think the market underestimates its potential.
NYSE: DIS
Key Data Points
Cable TV is dying... slowly
Disney's linear-network revenue, which includes its traditional television networks such as ABC and ESPN, saw a 5% decrease in the year ending at $6.34 billion. However, the company's operating income increased by 6% to reach $1.74 billion. This indicates that while the linear-network business may be experiencing a slow decline, Disney has been able to maintain a strong profitability in the segment.
Linear TV is definitely in decline, but its fall may take place over a long period of time, potentially even decades. In the meantime, Disney can rely on this business as a major source of cash flow. That's good news as it builds out the streaming business.
Parks are still an amazing business
In fiscal 2021, Disney's parks and experiences revenue saw a significant increase of 73% from the previous year, reaching $28.71 billion. This was accompanied by a substantial jump in operating income, which increased from near breakeven to $7.91 billion. This solid financial performance can be attributed to the full reopening of most of Disney's resorts in the United States, which have been extremely busy this year.
However, it is worth noting that the COVID-19 pandemic is still a drag on Disney's parks and experiences business, particularly in China, where Shanghai Disneyland has been subject to restrictions. But you can see that even a year with mild operating limits can be extremely profitable for the parks business.
Looking forward, Disney's parks and experiences business will likely continue to be a key source of cash flow for the company. Of course, 2021 growth won't be repeated, but when combined with linear TV, the legacy business generates nearly $10 billion in operating income per year.
Streaming will take years to fully play out
Where investors don't know what to expect is streaming. But I think Disney is clearly one of a small handful of companies that will win in streaming, and this could be a very profitable business long term.
As of Oct. 1, 2022, Disney had 102.9 million paid Disney+ subscribers and an additional 61.3 million from Disney+ Hotstar (an Indian offering that is lower margin). ESPN+ adds another 24.3 million subscribers, and Hulu has 47.2 million. The problem is that this direct-to-consumer segment lost $4.0 billion on $19.6 billion in revenue as Disney spent billions on streaming content.
But there's good news on the horizon. In the U.S., Disney recently raised the price of Disney+ from $8 per month to $11 per month for the no-ads version. There's now an ad-supported tier for $8 per month. This is a 38% price increase; just the 102.9 million non-Hotstar customers would add $3.7 billion in revenue, nearly wiping out the operating loss.
This is just the latest price increase for Disney. Remember, the streaming service launched at a price point of as little as $4 per month in the U.S., which has now increased to $11. More price increases will come as content is added, and the margins on streaming will increase as a result.
Disney looks like a good value today
If you can wait for the streaming business to turn profitable and parks to get back to full operations, I think Disney will be a great company to own over the next five years. The company has a $164 billion market cap, and if net income returns to pre-pandemic levels over $10 billion, it's a reasonable valuation.
DIS Net Income (TTM) data by YCharts.
When he returned as CEO, Bob Iger knew price increases at Disney+ would help profitability. He may be able to focus the company on great content once again, working his magic for a second time at Disney.
