Shares of The Walt Disney Co. (DIS, Financial) are down 32% so far this year. The stock is now trading near the March 2020 level, when the Covid-19 pandemic caused global economic disruption. The launch of Disney+ a year before the pandemic helped the stock gain traction despite mobility restrictions drying out its theme park business in 2020 as the company reported strong growth from its streaming business. The current economic slowdown, however, has raised concerns about the growth of the streaming business, and these concerns have pushed Disney stock lower along with broad market turbulence.
Many investors are currently pessimistic about stocks in general, with the S&P 500 falling 21% in the first half of 2022. Although the market appears to be recovering slightly, investors remain concerned about economic uncertainty caused by rising interest rates, high inflation, geopolitical conflicts and the possibility of a recession.
These factors, combined with Disney's disappointing second-quarter financial results, have made it difficult for the stock to recover in recent months. Inflation is likely to eat into consumers' purchasing power, affecting both streaming subscriptions and the theme park business. Despite these concerns, many gurus, including Mario Gabelli (Trades, Portfolio), Tom Gayner (Trades, Portfolio) and David Tepper (Trades, Portfolio), bought the stock during the second quarter in a vote of confidence for what the future holds for the company.
Disney+ continues to add subscribers, but at a slower pace
Disney is a well-diversified entertainment company. The mobility restrictions and other pandemic-related safety measures wreaked havoc on its theme park business, but also boosted its streaming service, Disney+, which surpassed 100 million subscribers within a year of its launch. Despite fierce competition among major streaming media companies, the entertainment giant reported higher-than-expected growth in streaming subscribers across all of its media platforms.
In the fiscal third quarter, the company reported 221 million subscribers across all of its direct-to-consumer services, including 14.4 million new Disney+ subscribers, bringing the total subscriber count to 152.1 million. Disney's direct-to-consumer segment lost $1.06 billion at the operating level, a significant increase from the year-ago quarter's loss of $293 million.
In the coming quarters, paid subscriber additions could slow down with inflation wreaking havoc on consumers' wallets, but the expected launch of the ad-supported content tier on Dec. 8 may help the company accelerate subscriber additions once again.
Disney+ global subscriber count by quarter
Last year, Disney films received 23 Oscar nominations, with "Encanto" winning the award for the best animated feature. This year, however, the story appears to be different. The theatrical release of "Lightyear," the prequel to the animated classic "Toy Story," was met with mixed reviews. The film only made about $156 million through late June, falling short of its $200 million budget. In August, it added a slew of Marvel, Pixar and Star Wars content, which might have helped the company boost subscriber growth. The company intends to release 180 original titles before the fiscal year ends.
Disney’s content production costs have increased along with the growing importance of the streaming business, which is something investors need to take into account as they could lead to a margin contraction in the future.
The recovering travel sector is driving growth, but risks are looming on the horizon
Disney's core business segment - parks, experiences and products - rebounded strongly in early 2022 with revenue more than doubling to $6.7 billion in the fiscal second quarter. The theme parks segment then reported $2.18 billion in revenue fore the fiscal third quarter against revenue of just $356 million in the prior-year quarter.
Despite the temporary closure of Shanghai Disneyland and Hong Kong Disneyland due to local Covid spikes, the company saw an increase in attendance, hotel bookings, cruise ship sailings and food, beverage and merchandise spending. With the reopening of the Shanghai park and the maiden voyage of its newest cruise ship, The Disney Wish, the company is expected to report strong growth in this segment in the current quarter as well.
Despite the return of international travelers, the company said they still accounted for less than the levels seen before the pandemic in recent quarters. Investors should not overlook the impact of rising costs, which are already having an impact on its direct-to-consumer business. It would be even worse if there was a drop in customer spending just as the parks are getting back on track. In the current economic climate, it is risky to predict that more people will spend money on theme parks and cruises in the coming months.
Disney is currently valued at a significant discount to its March 2021 highs. The biggest challenges the company faces today are short-term in nature, which could be one of the factors behind the recent glut in guru investments. The long-term prospects for both Disney’s streaming business and its theme parks are promising. The entertainment giant is more attractively valued today due to the strong comeback in the parks segment.