If Disney+ is the main reason you own Walt Disney (HAZE 0.90%) stock right now, you’re probably a little frustrated. The company’s flagship streaming service, along with its ESPN+ and Hulu platforms, is still adding subscribers, but the pace of that growth is slowing as revenue per user falls. The company’s direct-to-consumer business also remains in the red, posting increasingly large losses.
Disney says the worst of those losses are behind it and maintains that Disney+ will be profitable by 2024. And maybe it will be.
Given all the underlying trends, current and potential investors may consider the possibility that these profits will not be achieved as easily as the company suggests.
Moving in the wrong direction
The good news is that Walt Disney’s direct-to-consumer (or streaming) ventures generated $4.9 billion in revenue last quarter, up nearly 8% year over year. Counting the version of the service including India’s Hotstar, Disney+ now has 164.2 million subscribers, adding 12.1 million customers during the quarter ending in early October. ESPN+ and Hulu also added subscribers, bringing their combined total to 71.5 million users. The company now manages nearly 236 million unique streaming subscriptions, though a good portion of those users pay for ESPN+, Disney+ and Hulu as a bundle.
The bad news is that all the content and effort needed to keep those customers doesn’t come cheap. Last quarter’s operating loss for the media giant’s direct-to-consumer arm hit a record $1.47 billion. The graphic below puts things – and the trend – into perspective.
The Bulls will point out that CEO Bob Chapek addressed this issue during Tuesday night’s Q4 earnings call by explaining, “We still expect Disney+ to reach profitability in fiscal 2024 as losses begin to shrink in the first quarter of fiscal 2023. [currently underway].” And, as was mentioned, perhaps that is the shape of things to come.
There are three key headwinds that just might keep Walt Disney’s Disney+ from reaching the proverbial promised land of profitability, even with the impending launch of an ad-supported version.
Easier said than done
The first of these headwinds is that Disney’s total streaming revenue, while modest, fell on a sequential basis last quarter despite continued subscriber growth.
Blame it mostly on Disney+. Average revenue per domestic (US and Canada) fell from $6.81 per month a year ago to just $6.10 per month last quarter, and was also down slightly from the fiscal third quarter of $6.27. The international version of Disney+, as well as the Hotstar offering, saw similar sequential declines in average monthly revenue per user, although these low-cost services have a smaller impact on Disney’s top and bottom lines. It’s a subtle hint that the marketability of these services may be waning here and abroad, and that weakness is offset only by price breaks.
Unfortunately, Disney does not plan to do more marketing to increase these numbers. It is looking to do less. During Tuesday’s earnings call, Chapek only asked investors to look for “a realignment of our [direct-to-consumer] costs, including meaningful rationalization of our marketing costs.”
This move could turn out to be wrong in light of the other stumbling block that could potentially stand in the way of Disney’s earnings forecast for Disney+. There is competition from all sides, including an old one that many assumed was a once-in-a-lifetime.
Believe it or not, cable TV is making a comeback. While the large number of US consumers who regularly stream remains dominant at 75%, figures from a recent survey conducted by Hub Entertainment Research show that the number of people watching live TV events increased from 21% a year ago to 23% this year, which extends a slow, steady streak of recovery. It’s not much, but it’s something to build on at a time when market saturation is a serious concern. Another recent poll of US consumers conducted by NPR and Ipsos suggests that 69% of them think there are too many streaming services, while 58% of this crowd admit to feeling overwhelmed by the sheer number of streaming choices.
Meanwhile, other streaming names are garnering accolades that Disney isn’t. Rival HBO Max boasts the most award-winning content in the streaming arena, according to Ampere Analysis. Netflix (NFLX 3.14%) is now number two.
The bottom line is that future Disney+ customers may be tougher and more expensive to get than past and current ones.
Finally, there is the great paradox. Disney may be learning the only way to keep adding at least some streaming subscribers is to expand its streaming library by increasing its streaming content budget, compounding the problem of too much choice while exacerbating the problem of content consumption. It’s a tricky balance, to be sure.
Keep your expectations in check
Never say never. Walt Disney’s streaming operation may well move out of the red and into the black by 2024, with measurable progress towards this taking shape as early as the next quarterly report.
In retrospect, however, Walt Disney’s overhaul in 2020 was meant to prioritize the then-booming streaming business, tying too much of the stock’s value to that particular opportunity. The direct-to-consumer business, which generates less than $5 billion in revenue per quarter (only about a quarter of the total business anyway) is still regularly in the red to a billion dollars or more per quarter, and there’s still no compelling, compelling explanation on how the company is going to close this gap in a meaningful way.
Until there are more answers than questions — and more certainty rather than less — regarding its ballyhooted streaming initiatives, this stock is going to be hard to own. It could take several quarters, if not years, to achieve the kind of clarity investors really need here.