Shares of Disney (DIS -0.58%) dropped nearly 9% on Thursday after the entertainment giant reported results that disappointed investors. Revenue was up 13% year over year in Disney's fiscal second quarter, which ended April 1, but adjusted earnings per share declined by 14%. Relative to analyst expectations, those results were mixed.
It was Disney's streaming business that grabbed headlines. Direct-to-consumer revenue was up 12% to $5.5 billion thanks to higher pricing, but subscriber growth hit a wall. The number of Disney+ subscribers in the U.S. and Canada dipped 1% from the end of 2022, while the total number of Disney+ subscribers globally fell 2%. Hulu and ESPN+, the company's other streaming services, gained minimal new subscribers.
Subscriber losses for the Disney+ service seems to have investors worried. The direct-to-consumer segment is also still unprofitable, losing $659 million on an operating basis in the second quarter. With the stock down hard on this news, should savvy long-term investors take advantage?
More good news than bad
While Disney+ lost some subscribers during the quarter, those losses were minimal given the size of the price increase pushed through recently. The monthly price of the ad-free version of Disney+ was raised from $7.99 to $10.99, a 38% increase. The fact that Disney barely lost any subscribers in the wake of this price increase should be viewed as a testament to the company's pricing power.
The price hike pushed the average monthly revenue per subscriber for Disney+ in the U.S. and Canada up 20% in the second quarter to $7.14. Disney+ is also available as a cheaper ad-supported service, as part of bundles, and in annual plans, which all work to reduce this average monthly revenue.
Higher prices coupled with lower costs led to a vast improvement in streaming profitability. While the direct-to-consumer segment still lost $659 million in the second quarter, that compares to a loss of $1.1 billion in the first quarter, and a whopping $1.5 billion loss in the fourth quarter of 2022. On top of higher prices pushing up revenue, Disney was able to reduce expenses by about $200 million from the previous quarter.
Disney will simplify its streaming choices for consumers by the end of this year with a new app that combines Disney+ and Hulu content. Both services, along with ESPN+, will remain available as stand-alone options. In an effort to reduce costs further, Disney plans on producing less content for its streaming services. The company will also remove some content, taking an impairment charge between $1.5 billion and $1.8 billion.
Disney certainly has plenty of work left to do before its streaming business will be a cash machine for the company, but the success of the price increase plus the ongoing effort to cut costs is moving the business in the right direction.
Buy Disney stock on the dip?
Disney is a big, complicated company, and its earnings are currently depressed by the losses in the streaming business. Analysts expect Disney to report adjusted earnings per share of $4.10 this year, which would put the price-to-earnings ratio at roughly 23. That doesn't seem particularly cheap.
DIS Net Income (TTM) data by YCharts
But earnings have the potential to rise dramatically in the coming years as Disney's streaming business matures. Disney's net income is still far below pre-pandemic levels, and while the linear TV business faces plenty of long-term uncertainty, the parks business is recovering strongly. Domestic parks and experiences revenue grew 14% year over year in the second quarter, and international revenue more than doubled. Overall, operating income in the parks, experiences, and products segments surged 23%.
Disney's unparalleled collection of characters, brands, and intellectual property, along with a multitude of different businesses that can leverage those assets, is the core reason to invest in Disney stock. While streaming is still losing money, my guess is that won't be true for much longer.
