Disney Earnings: Smaller Streaming Losses Are Nice, but Subscriber Growth Needs Reinvigorating

Disney Stock at a Glance

• Fair Value Estimate: $155
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

DIS Earnings Update

Disney DIS posted a disappointing fiscal second quarter as CEO Bob Iger has begun to make his mark. Parks remained impressive with strong top- and bottom-line results and streaming losses continued to shrink, but Disney+ lost subscribers and Hulu posted very modest gains. While the direct-to-consumer segment appears on the way to profitability by the end of fiscal 2024, we think Disney needs to expand the DTC customer base and drive stronger top line growth to replace declining linear networks revenue.

We are lowering our fair value estimate to $145 from $155 to account for slower DTC subscriber gains along with a faster decline at linear networks.

Disney+ lost 4.0 million net customers globally in the quarter, including a 200,000 loss in the U.S./Canada and 4.6 million in Hotstar countries. Disney+ ended the quarter with just under 158 million subscribers. Average monthly revenue per paid Disney+ subscriber dropped in every area except the U.S, which grew by 13% thanks to a price increase in December. Customer defections due to the price increase appear lower than expected as Iger announced that the ad-free tier will receive another price hike later this year.

While Iger has been negative in the past on the value of general entertainment content, he announced plans for Hulu to be integrated into Disney+ in the U.S. This mirrors international versions of Disney+. Disney believes that having one app will promote higher usage and increase advertising opportunities. Additionally, general entertainment content should help Disney+ both add and retain subscribers. Management expects stronger subscriber net additions in non-Hotstar markets in the second half of the calendar year.

We don’t believe the integration of Hulu means that Disney would be willing to pay any price for the Comcast stake. The majority of the content on Hulu comes from Disney and other third parties outside of Comcast. As a result, Disney could rebrand the Hulu vertical as Star with minimal content loss.