Disney+ isn’t poised to boost Disney stock anytime soon

If Disney+ is the main reason you own waltz disney (SAY 4.28%) stock right now, you might get a little frustrated. The company’s flagship streaming service, as well as its ESPN+ and Hulu platforms, continue to add subscribers, but the pace of that growth is slowing as revenue per user declines. The company’s direct-to-consumer business also remains in the red, recording increasingly large losses.

Disney says the worst of these losses are behind it all and maintains that Disney+ will be profitable in 2024. And it just might be.

Given all the underlying trends, current and potential investors may want to consider the possibility that these profits may not be realized as easily as the company suggests.

Go in the wrong direction

The good news is that direct-to-consumer (or diffusion) companies generated $4.9 billion in revenue last quarter, up nearly 8% year-on-year. Counting the version of the service that includes India’s Hotstar, Disney+ now has 164.2 million subscribers, adding 12.1 million customers in the quarter ending in early October. ESPN+ and Hulu also added subscribers, bringing their collective numbers to 71.5 million users. The company now manages nearly 236 million unique streaming subscriptions, although a good number of those users pay for ESPN+, Disney+ and Hulu as a bundle.

The bad news is that all the content and effort required to retain 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 chart below puts things – and the trend – into perspective.

Data source: Walt Disney Company. Table by author.

Bulls will point out that CEO Bob Chapek addressed the issue during Tuesday night’s fiscal fourth quarter earnings call, explaining, “We still expect Disney+ to achieve profitability in fiscal year 2024, so losses begin to decline in the first quarter of fiscal 2023. [currently underway].” And, as noted, that may be the shape of things to come.

However, there are three main headwinds that could prevent Walt Disney’s Disney+ from reaching that proverbial promised land of profitability, even with the imminent launch of an ad-supported version.

Easier said than done

The first of these headwinds is that, while modest, Disney’s total streaming revenue fell on a sequential basis last quarter despite continued subscriber growth.

Blame Disney+, mostly. Its average income by country (US and Canada) fell from $6.81 per month a year ago to just $6.10 per month last quarter and also fell slightly from the figure of 6.27. $ of the third fiscal quarter. The international version of Disney+, as well as the Hotstar offering, saw similar sequential declines in average monthly revenue per user, although these lower-cost services had less of an impact on Disney’s bottom line. It’s a subtle hint that the marketability of these services may be declining here and abroad, with that weakness only offset by price drops.

Unfortunately, Disney doesn’t plan to do more marketing to boost those numbers. He seeks to do less. During Tuesday’s earnings call, Chapek only told investors to look for “a realignment of our [direct-to-consumer] cost, including a significant rationalization of our marketing expenses. »

That move may prove wrong in light of the second stumbling block that could hamper Disney’s earnings projection for Disney+. It’s competition from all sides, including an old one that many assumed was a has-been.

Believe it or not, cable television is making a comeback. While the number of American consumers who stream regularly remains dominant at 75%, figures from a recent survey by Hub Entertainment Research indicate that the number of people watching live TV events has increased from 21% a year ago. one year to 23% this year, extending a slow and steady recovery streak. It’s not much, but it’s something to rely on at a time when market saturation is a serious concern. Another recent survey of American consumers by NPR and Ipsos suggests that 69% of them think there are too many streaming services, while 58% of that crowd admits to feeling overwhelmed by their number of streaming choices. streaming.

In the meantime, other streaming names are racking up accolades that Disney isn’t. Rival HBO Max has the most award-winning content in streaming, according to Ampere Analysis. netflix (NFLX 7.98%) now takes second place.

The thing is, future Disney+ customers can be harder and more expensive to find than past and present customers.

Finally, there is the great paradox. Disney may learn that the only way to keep adding at least a few streaming subscribers is to expand its streaming library by increasing its streaming content budget, compounding the problem of too many choices while exacerbating its content spending problem. . It’s a delicate balance, of course.

Keep your expectations under control

Never say never. Walt Disney’s streaming operation could well go from red to black by 2024, with measurable progress in that direction as early as the next quarterly report.

In retrospect, however, Walt Disney’s 2020 revamp was intended to prioritize its then booming streaming business, and tied too much of the stock’s value to that particular opportunity. Its direct-to-consumer operation generating less than $5 billion in revenue per quarter (only about a quarter of its total business anyway) is still consistently in the red to the tune of $1 billion or more per quarter, and it doesn’t. There’s still no convincing argument, a convincing explanation of how the company will close this gap in a meaningful way.

Until there are more answers than questions — and more certainty rather than less — about its successful streaming endeavors, this title will be tough to own. It could take several quarters or even years to achieve the kind of clarity that investors really need here.

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