Shares of Walt Disney (DIS -0.02%) took a price cut following the company's second-quarter earnings report, but it may present a great opportunity for long-term investors to buy shares.
The big news moving shares was a decline in Disney+ subscribers. Most of the drop stems from India, where Disney gave up key sports rights driving subscriptions in the market. It also lost some domestic subscribers as it pushed through a price increase.
But the big picture is still positive for Disney. Here are five reasons investors should consider buying shares after the recent sell-off.
1. Improved streaming profits
Despite the drop in subscribers, Disney is showing massive improvements in the profitability of its streaming efforts.
Operating losses across Disney's direct-to-consumer (DTC) segment totaled just $659 million, a $400 million sequential improvement. The improvements in operating losses appear to be driven primarily by the price hike from last year, which pushed subscription revenue higher.
Going forward, management said operating losses for the DTC business would expand a bit in the third quarter but move back toward breakeven in the fourth quarter. CFO Christine McCarthy reiterated that the fourth quarter of last year would be the high watermark for operating losses for the segment.
While the price hike has had a modest impact on subscriber cancellations, it's ultimately shown to be revenue positive and a strong boost to the bottom line.
2. The Disney+ ad-supported tier is off to a strong start
Management didn't provide any specifics around ad-supported adoption or monetization rates, but their plans indicate it's gone extremely well.
CEO Bob Iger wants to make the ad-supported tier even more popular. "We clearly would like to drive more subs to the ad-supported service -- which we did in the quarter, by the way -- the obvious reason because the ARPU potential of the ad-supported Disney+." He sees a lot of ad spending moving toward digital video.
To that end, the company plans to raise the price of the ad-free service and possibly keep the ad-supported tier at the same price. Increasing the price gap between the two tiers should drive more consumers to the ad-supported tier. Moreover, management plans to introduce an ad-supported tier in Europe later this year.
3. ESPN+ and Hulu still grew
Both ESPN+ and Hulu added subscribers in the second quarter, indicating strength in those products and the bundled offering.
In the earnings report, management noted a higher mix of multi-product subscribers impacting the revenue-per-user numbers for both services. In other words, more people are subscribing to the Disney bundle, which includes ESPN+, Hulu, and Disney+ for a lower price than subscribing to all three separately.
Disney has intentionally driven customers to the bundle as part of its recent price increases across its streaming services. While the price of all three services has gone up in the past year, the bundle for all three remains the same price it's always been: $19.99 per month. Pushing customers to the bundle, especially customers who were only really interested in one of Disney's streaming services, increases customer lifetime value.
4. ESPN looks really strong
Not only did ESPN+ subscribers grow, but management also noted ad revenue for the main ESPN cable network family was flat year over year, even after adjusting for one-time benefits during the quarter.
"The sports advertising marketplace is currently stable with quarter-to-date ESPN domestic linear cash ad sales pacing up," McCarthy said on the earnings call. "However, the overall entertainment advertising marketplace has been challenging," she noted.
Indeed, overall ad sales for the linear networks segment declined 10% year over year. And while subscriptions declined 6% from last year, it pushed through another 3% increase in affiliate fees. ESPN is integral to getting more Disney networks into cable bundles and increasing affiliate fees across the board, helping to offset cord-cutting. At some point, however, Disney will have to decide to make ESPN a DTC streaming service.
5. The parks business continues to come back even stronger
Disney's parks business has come roaring back since pandemic restrictions were lifted, and it kept up that momentum in the second quarter.
Disney parks, experiences, and products grew revenue by 17% year over year, and operating income improved 23% year over year.
International parks had a very strong quarter, with success in Shanghai, Hong Kong, and Paris. "We have several international expansions underway that will allow our parks to continue to build capacity and drive longer-term growth," Iger noted on the earnings call.
Disney's cruise business is also growing, with the addition of the Disney Wish ship in the fourth quarter. Cruises were a big contributor to the year-over-year improvement in domestic operating margin, and Disney is having no problem selling the added capacity.
Missing the forest for the trees
The market is overly concerned with the drop in Disney+ subscribers, despite the strong financial results Walt Disney just posted.
The subscriber challenge will heal itself as Disney refocuses on content that drives high-value subscribers, and consumers digest the price increases. Meanwhile, the streaming business is improving its profitability, linear networks are managing through a difficult period, and parks are crushing it. The pullback in price looks like a great opportunity to buy shares of the media company.
