Disney+ Distracts Investors From Pandemic Woes

Cheyne Gateley/VIP

What pandemic?

Disney’s core businesses may have gotten pummeled during the third quarter as a result of COVID-19, but investors didn’t even flinch Tuesday when the company reported earnings. Instead, nascent streaming service Disney+ stole the show and sent the stock soaring in after-hours trading, leaving some scratching their heads. 

Shares of the media giant were initially volatile in the after-hours session following its Q3 earnings announcement. Then shortly after the earnings conference call kicked off, the stock jumped 5% after Disney CEO Bob Chapek announced that as of Aug. 3, Disney+ had 60.5 million subscribers, up from 54.5 million in the beginning of May. 

On top of that announcement, Chapek announced that after numerous theatrical delays caused by COVID-19, Disney’s highly anticipated live-action film “Mulan” would be going straight to Disney+ for a cost of $29.99 on September 4. 

All of these new announcements about Disney+ are awe-inspiring and should be applauded, but did investors forget that Disney+ is still a long ways away from profitability? Are investors going to just overlook the fact that Disney’s most lucrative segments got crushed as a result of the global pandemic, and a real recovery could take a while? 

Disney did manage to post a surprise adjusted profit during its Q3, but overall revenue plunged 42% from last year, to $11.78 billion. Aside from Disney’s direct-to-consumer & international segment, which houses Disney+, every single other unit saw year-over-year revenue declines. 

Most notably, Disney’s most profitable and cash-generating segment — parks, experiences and products — swung to an operating loss of $1.96 billion compared to $1.7 billion profit in the same quarter last year. Revenue for the segment tanked 85% from last year to below $1 billion. 

The company said it took a $3.5 billion hit to its operating income due to closures of parks, cruises and resorts. Disney’s parks have been on a steady reopening plan, but capacity and operations are still limited. 

Disney’s parks segment may have been hit the hardest, but the blow to its studio entertainment segment was also jaw-dropping. Unable to release any new films in theaters since the pandemic ravaged the U.S. in March, studio entertainment revenue sank 55% year-over-year to $1.7 billion. 

It’s encouraging to see Disney explore new ways to bring fresh content to the public during unprecedented times. But keep in mind, Disney’s direct-to-consumer segment reported an operating loss of $706 million in Q3. In addition, average revenue per user (ARPU) for Disney+ fell 18% from last quarter to $4.62 in Q3 from $5.63.

That’s a long way from profitability. When asked by an analyst whether or not Disney plans to focus on subscriber growth or profitability, Chapek explained that the priority is to go after a bigger market of subscribers as opposed to getting to profitability. 

Disney’s initial goal for Disney+ was to reach 60 million to 90 million subscribers by 2024. Tuesday’s announcement puts Disney four years ahead of plan by hitting the lower end of its target less than one year after launch. Pandemic or not, it was a pretty impressive feat.

And bringing “Mulan” straight to Disney+ was a surprise move, but it doesn’t signal a complete shift in strategies going forward, according to Chapek. There will be a lot to learn from “Mulan” shifting to a PVOD offering. First, how many people will pay $29.99 to watch the film, and more importantly, how many people will sign up for a Disney+ subscription to watch. 

Some have argued that you can compare Disney+ to Netflix in its early days, but unfortunately for Disney, Netflix doesn’t have a bunch of other businesses to worry about. 

Sure, earnings announcements are backwards looking in nature, and what typically matters more is outlook for the future. But these are unprecedented times, and no one knows how long COVID-19 will wreak havoc on companies and the economy. 

Perhaps Disney investors should also begin acknowledging the bad news instead of just focusing on the growth potential of a young and unprofitable piece of the company.