The stock market has not taken too kindly to The Walt Disney Co.'s (DIS, Financial) second-quarter earnings reveal. The 2% dip in paid Disney+ subscriptions is under the microscope, and investors have felt deflated following the development. Consequently, the stock has traded in the red.
To be fair, the market seems fixated on the drop in low-value subscribers in its business. The positives during the quarter, including debt reduction, cost control initiatives and robust cash flow growth, are important and impressive undertakings.
As the dust settles, the continued growth in streaming revenue and the irresistible charm of its theme parks should eventually wow investors again. There are invariably multiple bumps on the road, but it is imperative not to blur the bigger picture. Amid the challenges, Disney's vigorous commitment to cutting costs while expanding sales underscores a resilient business strategy.
Moreover, based on its GF Value, the stock is a remarkably undervalued offering with monstrous upside potential. It is trading at significant discounts to its historical averages while its financials remain relatively rock-solid.
Streaming business is actually in good shape
Perhaps the biggest and most obvious knock on Disney has been the apparent drop in subscriber numbers for its Disney+ platform. The company missing expectations on the bottom line weighed down its results even further.
To be fair, looking at the headline numbers, its paid subscribers are down considerably. After the first quarter, it had a whopping 157.8 million paid subscribers, which was down considerably from the 161.8 million subscribers it reported in the same quarter last year. At first glance, it would seem awful, but the bulk of the decline is attributable to its lowest-value international operations. In fact, its core Disney+ subscribers actually increased from 104.3 million t. 104.9 million; on top of that, it enjoyed a healthy bump in monthly average revenue per user from $3.93 to $4.44.
Furthermore, while Disney+ lost subscribers during the quarter, they were minuscule if we look at the price increase it has pushed through of late. The monthly price of the ad-free version of its streaming service was increased by 28%. These higher prices and lower costs led to a significant improvement in streaming profitability. Though its direct-to-consumer segment lost $659 million during the second quarter, it is a marked improvement from its loss of $1.1 billion in the first quarter. Additionally, Disney kept its expenses down from $200 million in the previous quarter.
Moreover, the entertainment giant is looking to simplify streaming options for its customers by the conclusion of this year by combining its Disney+ and Hulu content. In curbing costs further, Disney plans to produce less content for its streaming services.
Profitability situation is impressive
Another major positive for Disney is its extraordinary profitability position despite being weighed down by market headwinds. It reported profits of 69 cents per share, which was significantly higher than the 26 cents per share it reported a year earlier. Conversely, it came roughly two cents per share lower than analyst estimates.
The reported earnings per share culminated in massive net profits of $1.27 billion and a colossal improvement over the $470 million it reported a year earlier. Also, operational cash flows spiked from $1.77 billion to an amazing $3.24 billion.
Disney's star of the show in its first quarter was its Parks, Experiences and Products segment, with sales growing 17% to $7.78 billion. Additionally, theme park admission sales shot up over 23%, while resort and vacation sales rose 34%. Naturally, this had plenty to do with the company's parks and domestic attendance, which increased by 7% on a year-over-year basis, while per capita guest spending increased by 2%. Hotel occupancy rates are at a spectacular 89% compared to 84% a year earlier.
A glance at Disney's GuruFocus profile speaks volumes of how robust its profitability profile is compared to its peers. It boasts a profitability rank of 8 out of 10, with high profitability that may stay that way for the foreseeable future. Operating margins are at 10.4%, with nine years of profitability over the past decade. Its operating and net margins rank better than over 60% of companies in its peer group.
The bottom line
Disney's second-quarter earnings report may have landed a punch in investors' gut, but it is far from being the knockout blow. The dip in Disney+ subscriptions shook market confidence, but it is just one part of the story. With effective debt reduction, diligent cost control and robust cash flow growth, the company has proven to be incredibly resilient. Moreover, it is tough to ignore the potential of streaming revenue and the enchanting charm of Disney's theme parks. These are seeds of future prosperity waiting to bloom.
While the quarterly reduction in Disney+ subscribers raises eyebrows, a closer look reveals otherwise. The drop mostly stems from low-value international operations. Core Disney+ subscribers rose modestly, while average revenue per user got a healthy bump. Streaming profitability improved substantially with a strategic price hike and lower costs.
Despite a minor miss on earnings per share, it netted massive profits of $1.27 billion, and operational cash flows jumped impressively. Therefore, it is imperative not to be swayed by the short-term turbulence; Disney's story is still one of remarkable resilience and potential.
