Walt Disney (DIS -0.56%) reported revenue of $23.5 billion and adjusted earnings per share of $0.99 in its fiscal 2023 first quarter (ended Dec. 31), both of which exceeded Wall Street consensus analyst forecasts. Although shares were up after the news, they are still down a whopping 50% from their all-time high.
But there might be some renewed optimism surrounding the business, with Bob Iger back at the helm and with his huge cost-cutting plan drawing shareholder attention. If you're thinking of buying Disney stock, though, look at these two critical metrics before you do. They might change your perspective.
Trouble at the House of Mouse
During the latest fiscal quarter, Disney's direct-to-consumer (DTC) segment, which houses streaming services Disney+, Hulu, and ESPN+, posted revenue of $5.3 billion, up 13% compared to the year-ago period. This top-line growth is impressive given the macroeconomic headwinds facing many companies.
But what investors really need to focus on is the $1.1 billion operating loss this segment registered during the quarter. This is one of the metrics to pay attention to now. The DTC segment's operating loss was nearly double the $593 million loss posted in Q1 2022, so it's clearly far from where it needs to be.
This helps explain why Iger and his team plan to find $3 billion in annualized content cost savings going forward. With a lower cost structure, the hope is that margins will improve enough to reach positive territory. For what it's worth, Netflix (NASDAQ: NFLX) posted an operating margin of 17.8% in 2022.
In addition to the increasing operating losses, investors should pay attention to the average revenue per user (ARPU) for Disney+. In the most recent quarter, ARPU for Disney+ Core (excluding Hotstar, which would make the figure even lower) was just $5.77, down from $5.96 in the prior quarter. This is about half the average revenue per member of $11.53 that Netflix generated in the last three months of 2022. That means Disney+ has a long way to go despite already having such a sizable user base. But its ARPU is heading in the wrong direction.
Launched in November 2019, Disney+ grew rapidly, and now has 161.8 million subscribers. That's certainly admirable, especially considering how late to the streaming game Disney+ was. This fast rise was made possible by leaning on its incredibly popular intellectual property. But compared to Netflix, Disney+'s monetization hasn't been all that great.
"Our current forecasts indicate Disney+ will hit profitability by the end of fiscal 2024, and achieving that remains our goal," Iger mentioned on the Q1 2023 earnings call. "Since my return, I have drilled down into every facet of the streaming business to determine how to achieve both profitability and growth." It's likely that Iger's return to the top role had something to do with the mounting losses in this segment.
This all sounds good in theory, but I'm skeptical of this goal. In order to achieve profitability, Disney+ will probably have to continuously raise prices going forward. Apparently, the service's latest price hike was well received by customers, but betting on this to continue being the case is a huge risk. It is something that will be very difficult to do successfully given how competitive the streaming landscape is now.
Netflix was able to periodically raise its membership prices over the past decade because for a lot of that time, competition was limited. Now there are a number of viewing options at our fingertips. Add the factor of zero switching costs for users, and it will be harder to attract and keep customers while raising prices.
Because this is the company's main growth driver, until Disney can show some concrete evidence that Disney+ is consistently profitable and can sustainably increase ARPU while adding subscribers at a healthy clip, investors should think twice about buying the stock.
