It's good to be a Mouseketeer these days. Shares of Disney (NYSE:DIS) hit all-time highs on Wednesday, moving nicely higher after a strong start for the company's new Disney+ service. The media giant announced that it has now topped 10 million subscribers to the streaming video service, five times more than what at least one third-party researcher was projecting.
Between discounted deals for early sign-ups willing to prepay for a couple of years upfront and a free one-year trial for customers of the country's largest wireless carrier, it's not a surprise to see Disney+ hit the ground running. Now that the stock has taken out the all-time highs it hit over the summer, the real objective is to keep rewarding its shareholders.
Let's take a look at three things that need to happen for Disney shares to keep moving higher.
Image source: Disney.
1. Disney+ can't come at the expense of its media networks
There are a lot of moving parts to Disney, but the heart of its empire rests inside its media networks division. The segment accounted for 36% of its revenue in fiscal 2019 but, more importantly, a little more than half of its segment operating income.
Disney+ is a hit, but how much of that will come at the expense of folks cutting loose their cable and satellite television providers? Disney relies on chunky licensing fees for carriage rights it collects for allowing pay TV companies to offer ESPN, Disney Channel, ABC, and other of its properties.
Disney+ isn't the only reason for fewer folks tethered to linear television. The cord-cutting revolution happened long before Disney decided to burn its boats and disrupt itself. However, all of the initial excitement surrounding Disney+ will start to fade if we get to the point where Disney is trading dollars for nickels, walking away with a lot less in Disney+ revenue than it could have if those folks were sticking around with their cable and satellite TV plans.
2. Theme parks need to bounce back
Something's not right at Disneyland. Disney's original theme park has now suffered back-to-back quarters of declining attendance, and this is happening despite the park's most ambitious expansion in more than two decades. Star Wars: Galaxy's Edge was supposed to be a slam-dunk, but now enthusiasts are wondering if pessimists shot first.
Turnstile clicks need to pick up at Disneyland, just as they started turning the corner at Disney World in its latest quarter. Disney may be paying the price for stretching its pricing elasticity with day guests and introducing speed bumps for many of its annual passholders. If Disney isn't at its best right now, when the economy's humming along, how do you think it will hold up when we brace for the next recession?
3. Folks need to keep going to the movies
Disney has cornered the corner multiplex in recent years. The acquisitions of Marvel, Pixar, Lucasfilm, and now 21st Century Fox have padded Disney's own theatrical releases. It has this year's four highest-grossing films, and it will probably command all six top spots once Frozen 2 and Star Wars: The Rise of Skywalker roll out in the coming weeks.
There are two concerns, here, and they're both significant. Multiplex trends are problematic. Folks are still going out to the movies, but this is shaping up to be the fourth year in a row that average ticket sales for a domestic release have declined. The bigger near-term worry for Disney is that it will be hard to top its recent performance. There won't be another new Star Wars movie hitting the silver screen until at least 2022. We will continue to have a steady diet of Marvel releases, but it will be hard to top Avengers: Endgame.
We also don't know if the fact that Disney+ is now waiting to catch multiplex releases once the streaming window opens will hurt initial demand. A month of Disney+ costs less than a single ticket stub, and things could get hairy if folks decide they can wait a few months to see a theatrical release from the comfort of their living room instead.
Disney's doing great right now, and the stock agrees. However, keeping the good times going will be the real challenge.
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November 14, 2019 at 11:00PM
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