Consider the upcoming fourth quarter the last one on which the media sector will get a pass from Wall Street.
While Disney has shown in the last few quarters that investors are willing to forgive all the damage done across its businesses by the pandemic due to the strength of its streaming venture, investors may want to consider the possibility that this mindset won’t last much longer, as optimism for a return to normal is put to the test.
Q4 media earnings reports officially kick off Tuesday with streaming giant Netflix. But Netflix is an aberration because that company is all about streaming.
The rest of the media companies trying to become Netflix by focusing on streaming also have to rely on a handful of other business segments that are currently under severe pressure because of the ongoing global pandemic.
Last year was an aberration. COVID-19 changed consumer behavior, and media companies had to ramp up their strategy shifts to streaming even more rapidly than previously anticipated. Some companies thrived, and investors rewarded them generously for their initial success — ahem, Disney+.
Just a little over one year since its launch, Disney boasted that Disney+ had a whopping 86.8 million paid subs as of Dec. 2, up from 73.7 million at the end of the company’s fiscal Q4, ended Oct. 3. On top of that, Disney revised its sub guidance and expected between 230 million and 260 million paid Disney+ subscribers by the end of fiscal 2024, up from 60 million to 90 million.
These jaw-dropping announcements sent Disney shares surging to fresh all-time highs, and the media behemoth saw its market value soar past $300 billion for the first time ever. Even with the challenging economic backdrop of 2020, Disney stock weathered the storm because of its saving grace, Disney+.
But come 2021, that may no longer be the case.
Disney, as well as other media companies, rely on other segments to maintain a sustainable business. Media giants like Disney and NBCUniversal-parent Comcast have had to deal with the negative impact to their theme-park businesses. In the fourth quarter, theme parks remained either closed completely or operating on severely restricted attendance. And that proved to be problematic because theme parks are extremely profitable businesses and revenue generated from them are necessary in maintaining a healthy balance sheet.
Revenue from theme parks plunged 61% during Disney’s fiscal Q4, and Comcast reported NBCUniversal Q3 theme-parks revenue tanked 81%.
In addition, another profitable segment, movie production, was also either halted altogether or slowed with major limitations, affecting not only Disney and Comcast but AT&T-owned Warner Bros. and ViacomCBS, among a slew of others.
Looking at the film segments, Disney and ViacomCBS saw revenue gains year-over-year in Q1 but then saw large declines in Q2 and Q3. Meanwhile, Comcast and AT&T’s film businesses were hit throughout the entirety of 2020.
For all last year, media powerhouses have been able to flaunt their streaming service growth and all but promise a recovery in their other businesses in 2021. Now it’s time for tangible guidance and commentary following Q4 earnings announcements, which will be critical for investors to paint a clearer picture of what a post-COVID world looks like for these companies.
While streaming performance will surely play a big factor in post-earnings stock moves, the real impact will come from guidance and commentary about the future. Media companies’ ability to blame most of their business woes on COVID and hide behind their DTC strategies will only work with 2020 results.
Once a normalization in the market occurs, the performances of media’s core businesses will have to face their moment of truth.