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Questions are being asked about whether the company can hit ambitious streaming targets
Thursday 18 Nov 2021 Author: Martin Gamble

Shares in entertainment company Walt Disney plunged 9%, extending their losses in a difficult year for the company, as fourth quarter results (10 Nov) disappointed investors and fell short of analysts’ expectations.

The company has been tripped up by a combination of weaker than expected subscriber growth for its streaming services and rising costs. Year-to-date its shares are down 8.7% compared with a commensurate rise of 25% for the US S&P 500 index.


The company reported earnings per share of $0.37 compared with consensus expectations of $0.51.

The biggest disappointment, however, was the notable drop-off in sign-ups for its flagship Disney+ streaming business where the firm has been making a big push to compete with the likes of Netflix and Amazon Prime.

Despite subscriptions growing 60% year-on-year to 118.1 million, Disney only managed to sign up 2.1 million new customers in the quarter against market expectations of more than 10.2 million.

That’s less than half the number of subscribers that rival Netflix added over the same period, an increase which took its global subscriber base to 213 million.

Disney has 179 million subscribers to all its streaming services if ESPN+ and Hulu are included.

Undeterred by the slower growth chief executive Bob Chapek stuck to his guns and reiterated the firm’s prior forecast for Disney+ subscriptions to reach between 230 million and 250 million by the end of 2024.


Investor scepticism is understandable because to even achieve the bottom end of the target requires the company to add an average of 12.4 million subscribers every quarter for the next three years.

However, the company is confident that a strong pipeline of new titles from its marquee franchises – Disney, Marvel and Star Wars – which are due for release between July and September next year could entice new viewers and reignite subscriber growth.

The company will hope the heavily touted Disney+ day on 12 November helped net it a large number of new subscribers as it released new content on the platform and offered one-month subscriptions for $1.99 in the US and £1.99 in
the UK.

Not everyone is convinced of such a rosy future for streaming businesses though and there are concerns that the tremendous growth seen in the last few years may have saturated the market.

For example, in the US there are over 100 streaming services to choose from and fighting over the remaining millions of customers may prove more costly than envisaged.

Meanwhile companies need to spend billions on new content to keep their audiences entertained and loyal. To put that into some context, Netflix is on track to spend $17 billion on content this year.

Disney’s direct to consumer division which houses the streaming services business continued to spend heavily on programming and marketing and clocked-up higher operating losses of $630 million.


The company’s US theme parks saw a rebound in attendances and spending as they reopened though this came with a return of the costs associated with running the sites.

And, as international travellers have only recently been allowed to visit the US, a more significant recovery isn’t expected until next year.

Even here the company fell short of expectations with the division generating an operating profit of $640 million compared with forecasts for more than $900 million.

This reflected inflationary pressures, including increased staffing costs, which Disney is looking to address for the time being by adjusting suppliers, cutting portion sizes and substituting products, rather than increasing ticket prices.

While the strength of the Disney brand does give the company significant pricing power, clearly there are limits to this and it is not immune from the rising prices affecting businesses worldwide.

The company is also talking up the potential margin boost from its recently launched Genie+ app which for $15 per day offers some services to enhance the visitor experience while also offering queue-jumping passes which can be purchased through the platform.

Chapek noted alongside the Q4 numbers that nearly a third of guests at Walt Disney World Resort in Florida, where the system is being trialled, had signed up for the app.

The danger is that, by pushing too hard and making visitors pay for lots of little extras, they could alienate some people entirely, depressing overall numbers.

Ultimately though, the appeal of Disney’s content and characters, reinforced by real-world experiences at its resorts, should stand the business in good stead for the longer term, even if 2021 has turned out to be a difficult year. We still rate the shares as a good long-term investment.

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