May 12, 2022 - Economy

Disney stock slides despite streaming gains

Disney vs. <span style="color:#E50914">Netflix</span> streaming subscriber growth
Data: Company filings; Chart: Jared Whalen/Axios

Disney's stock slipped 2% Thursday, despite reporting streaming subscriber gains the day prior, as investors begin to weigh whether the company's massive investment in content is sustainable.

Why it matters: Disney's streaming division still isn't profitable and its losses widened last quarter. Wall Street is worried about whether the company's long-term streaming strategy is most lucrative to investors.

By the numbers: Disney's streaming division, which includes Disney+, Hulu and ESPN+, lost $887 million last quarter, up from $290 million a year ago.

  • Executives blamed those losses on rising production costs for original content on Disney+ and Hulu and higher sports rights costs at ESPN+.

"I'm not sure that's the best use of their capital," senior media analyst Michael Nathanson told CNBC. "I kind of wonder if they set targets themselves that are not achievable or will be too expensive to get there."

  • Nathanson said the company's push to scale its streaming services broadly will impact its ability to make more money from hyper-loyal users and fans.

Stat of play: Disney on Wednesday said it now has over 200 million paid subscribers across all of its services globally, bringing it a big step closer towards closing in on Netflix's longtime streaming lead.

  • The company attributed continued subscriber growth on its investments in content, which it says will total around $32 billion this year, down just slightly from initial projections of $33 billion.

Be smart: Disney's stock typically trades on its streaming value proposition, even though the company makes most of its money on parks and resorts and its broadcast and cable networks.

  • Although the company showed continued growth in its domestic parks operations and cable networks, investors were looking for a signal that Disney's streaming momentum will continue.
  • Executives said they believe they're still track to reach its long-term subscriber goal of 230 million to 260 million total subscribers by 2024, and that subscriber additions in the next two quarters will likely exceed the last two.
  • But they noted that because the last two quarters came in better than expected, subscriber adds for the next two quarters won't be as pronounced comparatively to the last six months.

The big picture: Netflix's massive selloff last month underscored Wall Street's expectation that streaming services begin to drive profit.

  • Netflix's slowed subscriber growth shows how much the company's business model is dependent on spending big on original content, which makes it harder to grow profits.

What to watch: The next frontier for growth for Netflix and Disney is introducing an ad-supported tier. Ad-supported tiers can increase subscriber numbers, as well as the average revenue per user.

  • Netflix initially said it was weighing offering a cheaper, ad-supported subscription plan over "the next year or two," but it told employees this week that they could come as soon as the end of the year, per The New York Times.
  • While Disney neglected to share more details about pricing and timing, Chapek did reiterate his confidence in Disney's ability build a strong advertising operation for Disney+, given its success and technical resources building ad-supported tiers for ESPN+ and Hulu.

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