Driven by the success of its streaming platform Disney+, shares of Walt Disney (DIS) are trading near all-time highs and have have gone on a tremendous run over the past year rising 40% during that span, besting the 33% rise in the S&P 500 index. But can that magic continue?
The media conglomerate is set to report third quarter fiscal 2021 earnings results after Thursday’s closing bell. Investors have gotten excited about the amount of firepower the company will apply towards streaming in an effort to better compete with the likes of Apple (AAPL), Amazon (AMZN) and, of course, Netflix (NFLX). Disney’s streaming success has been buoyed not only by its branded content, but also from its extensive library of consumer favorites from Pixar, Marvel, Star Wars and National Geographic, among others.
While Disney+ has exceeded Wall Street’s growth expectations amid stiff competition from established streaming platforms, it would appear growth fatigue has settled in. In Q2 Disney+ subscribers hit 103.6 million, which was roughly in-line with Street expectations, though a more bullish forecast, or the “whisper number,” had targeted a figure closer to 109 million. Meanwhile, Q2 revenues fell 13.3% to $15.6 billion, missing consensus by some $320 million.
Disney stock has since underperformed the S&P 500 index over the past six months, losing 2.5%, while the S&P 500 index has risen 14%. And the shares have lost almost 15% since reaching an all-time high go $203 in March.The market wants to know how much better can things get. The company has set a Disney+ subscriber growth target range of 230 million to 260 million in the next three years. While that subscriber goal would be impressive, if achieved, it will require significant investments which may impact profits. On Thursday investors will want more details about that long-term growth strategy.
For the three months that ended June, Wall Street analysts expects the Burbank, Calif.-based company to earn 56 cents per share on revenue of $16.8 billion. This compares to the year-ago quarter when earnings came to 8 cents per share on revenue of $11.78 billion. For the full year, ending October, earnings are projected to be $2.35 per share, up from $2.02 a year ago, while full year revenue of $67.72 billion would rise 3.6% year over year.
Pandemic lockdown restrictions have shuttered movie theaters across the country, while disrupting Disney’s movie release schedules. But accelerated vaccine distribution has allowed many states to relax some of these restrictions. That, of course, was prior to the Delta variant of the coronavirus.
In the second quarter, Disney reported EPS of 79 cents, easily beating the consensus estimate of 23 cents. However, as noted, total Q2 revenue was down 13%. During the quarter, the media and entertainment distribution segment which accounted for about 80% of revenue, logged revenue of $12.44 billion. While the 1% growth failed to impress, the segment gain was driven by strong growth in the direct-to-consumer business. Revenue was impacted by closures of some theme parks around the world and the capacity restrictions under which they operated.
This scenario highlights the importance of Disney+ subscriber growth and why the market has become fixated on that number given its offsetting effect for the parks business and other segment weaknesses. As such, in addition to Disney+ subscribers totals and guidance, on Thursday investors will want upbeat commentary about the streaming business' profitability targets. Investors will also listen closely for hints about the park re-openings and impacts of the Delta variant.
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