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Disney’s Streaming Ambitions Are Bearing Fruit (NYSE:DIS)

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Via SeekingAlpha.com

One of the most well-run companies in the world today has got to be The Walt Disney Company (DIS). Even given this, recent events have made the firm unattractive to many investors in the market. In particular, the impact associated with COVID-19 has left the company with a significant drop in sales that analysts can currently only guess at. During these times, it’s easy to write off an opportunity, but in a recent press release the management team at the firm revealed why, yet again, betting against Disney in the long run is a big mistake.

The fact of the matter is that its late-2019 launch of Disney+, its hallmark streaming service, is proving to be far more successful than even the company anticipated. The likely end result here will be positive for the firm, and when you add in to that the fact that recent events outside of management’s control will eventually go away, the upside opportunity for shareholders should not be ignored.

Disney+ is a wild success

When Disney launched its namesake streaming service on November 12th of last year, management had high hopes for the brand. They expected that by 2024 the service would see somewhere between 60 million and 90 million paid subscribers on its platform. If every customer paid the $6.99 per month fee or the $69.99 per year annual subscription rate to participate in the service, annualized revenue with that number of users would range between $4.20 billion and $7.55 billion.

Fast forward to today, and by at least one metric the service is already threatening to hit the bottom end of its range. Just five short months following the launch of Disney+, management announced that it had attracted more than 50 million paid subscribers to the platform. Specific numbers by country were not offered. All we know is that over the past two weeks the platform has launched in a number of countries. These include the UK, Ireland, France, Germany, Italy, Spain, Austria, and Switzerland. Around a week ago, the platform launched in India as well. Since then, it has come to boast 8 million subscribers from that country as well. This is included in the greater than 50 million figure.

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Given that there are still many countries for Disney to expand its service to, including Japan and eastern European nations, the opportunity for further expansion definitely exists. Add in more growth over time from recently-announced expansions (the aforementioned ones) since further adoption in those markets appears certain, and it’s not unreasonable to think we should comfortably surpass the 60 million lower subscriber threshold before 2020 is over.

Measuring the financial success of Disney+ really is not possible at this time. There are many variables here, including the impact of bundling and regional pricing differences. Let’s consider India as an example. The people there are not paying the equivalent of $6.99 per month or $69.99 per year. The service there is being rolled out as part of Disney’s Hotstar service. The price per month for the Disney+ Hotstar Premium offering is 299 rupees, or about $3.93. The annual charge is 1,499 rupees, or $19.71. Under the Disney+ Hotstar VIP offering, there is no monthly option. The annual one is 399 rupees, or $5.25. This is all a significant discount to what subscribers in the US are being charged. An example in the other direction is the UK. There, pricing is 5.99 pounds per month or 59.99 pounds annually. This translates to $7.46 per month or $74.75 per year.

While this uncertainty does exist, the bottom line is that this is certain to drive billions of dollars per year in the form of revenue to Disney. This is precisely what the company needs at this time. After all, as of this writing, all of its theme parks (both owned and branded ones) are shuttered across the globe. This is due to the COVID-19 pandemic. In 2019, the company’s Parks, Experiences, and Products segment saw revenue of $26.23 billion. This translated to 36.7% of the firm’s overall sales (excluding eliminations). Its operating income for the year was $6.76 billion. This works out to about 44.7% of the company’s segment profits (excluding eliminations but including other segment losses).

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Another interesting question is what this will mean for other streaming services. Disney owns ESPN+. It believes this platform will grow from the 2 million it had late last year to between 8 million and 12 million by 2024. It’s unlikely that ESPN+ will be affected in any way by Disney+, given how different their content is, but the same may not be true of Hulu, which Disney also owns. Hulu had, late last year, around 25 million paid subscribers. Management believes this will rise to between 40 million and 60 million by 2024. It is possible that Hulu is also faring well, but until we see some sort of guidance from management, it’s anybody’s guess. Bundling between these platforms should help to reduce any possible cannibalization, but it won’t eliminate it entirely.

The bigger question comes down to rival Netflix (NFLX). In its fourth quarter earnings report for last year, the company boasted 158 million paid subscribers worldwide. It also doesn’t benefit from the Disney name because, unlike the aforementioned subscriptions, it’s not owned by the firm. It’s a standalone entity. Given that Disney+ launched in the middle of Netflix’s final quarter for the year, it won’t be until Netflix’s upcoming earnings release for the first quarter that we see just how big a threat, if any, Disney+ may be. The same can be said of the anime streaming service Crunchyroll, which is owned by a subsidiary of AT&T (T). Its last tally counted 60 million users, 2.6 million of which pay for the service while the remainder are either inactive or generate ad-revenue for the platform. Given how niche it is, Disney+ probably will not be a true competitor, but only time will tell.

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Takeaway

Right now, what’s going on with Disney+ is fascinating. The company’s streaming service appears to be blowing past expectations. More likely than not, this trend will continue. Sadly, until we know more from management, there’s no telling exactly what kind of impact this will have on the firm, but it will likely generate many billions of dollars worth of sales for it this year. Such strong growth could pose a risk for other streaming platforms, including ones already owned by Disney, but even with this factored in the end result will very likely be positive for shareholders long term.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.




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