Disney continues to exceed all expectations in the streaming space accelerated by the stay-at-home COVID-19 environment. The Walt Disney Company (DIS) has been posting phenomenal streaming numbers that have thus far negated the COVID-19 impact on its other business segments, specifically its theme parks. Disney has had to shutter all its worldwide Parks and Resorts, and ESPN has been hit with the cancellation of virtually all sports worldwide. There’s been ebbs and flows with reopening efforts across the globe with mixed results followed by rolling lockdown measures. Despite the COVID-19 headwinds, Disney’s streaming initiatives have been major growth catalysts for the company. Disney+’ growth in its subscriber base has shifted the conversation from COVID-19 impact on its theme parks to a durable and sustainable recurring revenue model. This streaming bright spot, in conjunction with the optimism of its Park and Resorts coming back online, has been a perfect combination as of late. Disney+ has racked up 73.7 million paid subscribers, Hulu has 36.6 million paid subscribers, and ESPN+ has 10.3 million paid subscribers. Disney now has over 120 million paid streaming subscribers across its platforms. Disney+ has been wildly successful via unleashing all of its content (Marvel, Star Wars, Disney, and Pixar) in what has become a formidable competitor in the ever-expanding streaming wars domestically and internationally. Hence the tug-of-war on Wall Street between COVID-19 impacts versus the success of its streaming initiatives, with the latter winning out. Thus far, its streaming success has changed the narrative as its stock is approaching highs not seen since February. Disney is a compelling buy for long-term investors as its legacy business segments get back on track in 2021 in conjunction with these successful streaming initiatives.
Seeing Though COVID-19
Disney’s business segments will inevitably come back online as COVID-19 subsides worldwide, and widespread vaccination programs are rolled out. Disney’s theme parks will reopen over time, as seen with phased reopening efforts. Inevitably, movie productions will resume, movie theaters and theme parks will reopen to full capacity, and sports will return to pre-COVID formats. The resumption of all of these activities will feed into Disney’s legacy businesses in conjunction with its streaming successes. Disney continues to dominate the box office year after year with a long pipeline of blockbusters in the queue. Its Parks and Resorts continue to be a growth avenue with tremendous pricing power outside regardless of COVID-19. Disney is going all-in on the streaming front and acquired full ownership of Hulu. The company has launched its Disney branded streaming service with tremendous success with kudos from Netflix’s (NFLX) CEO Reed Hastings himself. I feel that the company offers a compelling long-term investment opportunity given its growth catalysts that will continue to bear fruit over the coming years despite the current headwinds.
Q4 Earnings Beat
The Walt Disney Company (DIS) announced its Q4 earnings and exceeded expectations on revenue, and showed less loss than expected. Disney reported a loss per share of $0.20 vs. a loss of $0.71 expected. Revenue came in at $14.71 billion vs. $14.20 billion expected. Disney also announced that it would forgo its semi-annual dividend in January to shore up its balance sheet and preserve capital.
Disney took an estimated $2.4 billion hit to its operating income from its parks being closed worldwide, which was less severe than its Q3 hit. Revenue from its Parks, Experiences, and Products segment (which includes cruises, resorts, and merchandise) declined by a whopping 61% compared to a year earlier to $2.58 billion. Media Networks revenue came in at $7.21 billion, up 11% year over year. Studio Entertainment came in at $1.6 billion, down 52% year over year. Direct-to-Consumer and International came in at $4.85, up 41% year over year. Since mid-March, Disney has been unable to release a new film in theaters, which has taken a toll on its studio business (Figure 1).
“Even with the disruption caused by COVID-19, we’ve been able to effectively manage our businesses while also taking bold, deliberate steps to position our company for greater long-term growth,”
“The real bright spot has been our direct-to-consumer business, which is key to the future of our company, and on this anniversary of the launch of Disney+ we’re pleased to report that, as of the end of the fourth quarter, the service had more than 73 million paid subscribers – far surpassing our expectations in just its first year.”
Bob Chapek, Chief Executive Officer, The Walt Disney Company
Although not as bad as the Q3 numbers, COVID-19 still negatively impacted Disney’s business segments in several ways, specifically at Parks, Experiences, and Products. Closures of theme parks, retail stores, suspension of cruise ship sailings, and guided tours while experiencing supply chain disruptions in Q4. Disney has delayed theatrical releases and suspended stage play performances at its Studio Entertainment. The company has seen advertising sales slump at Media Networks and Direct-to-Consumer & International. Disney has also experienced disruptions in the production and availability of content, including the cancellation or deferral of certain sports events and suspension of production of most film and television content. Many of these businesses have been closed consistent with government mandates. Impacts at other segments include lower advertising revenue at Media Networks and Direct-to-Consumer & International driven by a decrease in viewership, reflecting COVID-19’s impact on live sports events and a loss of revenue at Studio Entertainment due to theater and stage play closures (Figure 2).
Figure 1 – Streaming initiatives across its platforms with over 120 million paid subscribers in total
Figure 2 – Overall business impact on revenue per segment as a function of COVID-19 in 2020
Wildly Successful Disney+’ Launch
Disney+ has been an absolute juggernaut with a 73.7 million subscriber base that’s far ahead of Wall Street estimates and by internal projections. Disney had provided guidance of 60 million-90 million global subscribers by the end of fiscal 2024. Giving rise to potentially hitting the high end of these targets four years ahead of schedule. Later this year, Disney plans to continue expanding Disney Plus throughout Western Europe, as well as across Latin America and Japan, per Kevin Mayer, chairman of Walt Disney Direct-to-Consumer & International. Disney+’ content lineup includes more than 500 films and 350 television series from its collective brands of Disney, Pixar, Marvel, and Star Wars. There are also dozens of originals, such as the Star Wars live-action series “The Mandalorian.” There’s plenty of runway ahead for the streaming service, years into the future.
The Walt Disney Company (DIS) has successfully shifted its business model to a subscription-based service that produces a durable, sustainable, and predictable revenue stream. As a result, the company has shifted the narrative from COVID-19 challenges to a focus on becoming a streaming juggernaut with over 120 million paid subscribers across its various platforms. Its legacy business segments are ready to regain their footing as COVID-19 subsides via vaccine and therapeutic approvals in the backdrop. All the initiatives that Disney has taken over the previous few years to remediate its business and restore growth appear to be coming to fruition via its Fox acquisition and its streaming initiatives. Disney+ blew out expectations with 73.7 million paid subscribers thus far in 2020 and on pace to deliver projections four years ahead of schedule. Disney continues to invest heavily into its streaming services (Hulu, ESPN Plus, and its Disney+ streaming service) to propel its growth and dominance in the streaming space. The company is evolving to meet the new age of media consumption demands via streaming and on-demand content. Disney’s streaming initiatives will continue to be major growth catalysts moving forward. Disney is a compelling buy into 2021 as its legacy business segments get back on track in conjunction with its streaming initiatives.
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