Disney Earnings: Excellent Results All Around, Except for Streaming Subscriptions

Key Morningstar Metrics for Walt Disney

• Fair Value Estimate: $125.00
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Walt Disney’s Earnings

Walt Disney’s DIS fiscal first-quarter revenue grew 5% year over year, while operating profit grew 38%. Profit gains were driven by the firm achieving streaming profitability, its strong movie releases, and its strength in sports. Streaming subscriber numbers were roughly flat as the company continued fine-tuning its offering.

Why it matters: Financial success in streaming and strength in other businesses has blunted the impact of the rapidly declining linear networks business, which was once Disney’s cash cow. We don’t forecast significant streaming subscriber growth, but it’s critical that the subscriber base doesn’t erode.

• In the quarter, Disney added 1.6 million Hulu subscribers but lost 700,000 net Disney+ subscribers (including 1.5 million internationally) and 700,000 ESPN+ subscribers. Average revenue per international Disney+ subscriber grew 22% year over year on price increases, so some churn makes sense.
• Entertainment streaming revenue grew 10% year over year on a much larger subscriber base than a year ago and higher prices. Critically, profits continued to grow after first achieving profitability last year. The operating margin was 4.8%, up from 4.4% last quarter and losses last year.

The bottom line: Overall, Disney’s results were very encouraging. We maintain our fair value estimate of $125 per share and believe the firm’s wide moat will lead it to continue posting good results on strength in streaming and experiences, even as linear networks remain in rapid decline.

Big picture: Experiences remain the most important driver of Disney’s value, making up about 60% of operating profit and 40% of revenue, and their outlook continues to improve.

• Despite disruptions due to hurricanes in Florida and the firm realizing preliminary expenses for cruise ships not yet launched, revenue grew 3% year over year during the quarter, and operating income was flat.
• After weakness in the second half of last year, a couple of new cruise ships, and other new experiences opening, growth is set to accelerate.