Disney’s NYSE: DIS Investor Day took place on December 10. Disney had a lot to say, but the biggest takeaway was the high expectations for the Disney+ streaming service: 230-260 million subscribers by 2024.
For context, Disney+ has 86.8 million subscribers as of December 2. Netflix NASDAQ: NFLX, the video streaming king, still hasn’t crossed the 200 million subscriber level. Has Disney gotten ahead of itself?
Not if you look at the market reaction. Investors clearly believe it’s possible, as shares increased more than 13% the day after the event.
The market’s optimism, it turns out, is well-founded.
Disney+ is Growing Faster than Anyone Imagined
A lot can change in a year as everybody learned in 2020. In late 2019, Disney said it expected to have 60-90 million Disney+ worldwide subscribers by 2024. Here we are in late 2020 and Disney+ is already at the upper end of that range.
In the early innings of the pandemic, people were bored and turned to video streaming for entertainment. A survey concludes that one-third of US adults added a streaming service between March and May. Both Disney+ and Netflix acquired millions of subscribers during this period. Netflix, however, experienced a slowdown during the third quarter, which it attributed to a “pull-forward” effect. The thinking is that many would-be 2020 subscribers chose to sign up during that period.
Disney+ has experienced no such effect. Just look at the last two months: Disney+ had nearly 74 million subscribers at the end of last quarter (September 30). As stated earlier, the service had nearly 87 million subscribers on December 2. That equates to 17% growth in two months.
No, Disney+ isn’t going to see 17% growth every two months for the next four years, but it doesn’t need to: if Disney+ subscribers grow at a CAGR of 32% over the next four years, they would reach 260 million by 2024.
Disney+ is Using Pricing Power
Disney+ has run subscribers $6.99 a month or $69.99 a year since its inception. On Investor Day. Disney announced that Disney+ is increasing its subscription costs to $7.99 a month or $79.99 a year in March 2021.
Will this lead to millions of cancellations in an uncertain economy?
That’s unlikely. Netflix’s standard streaming plan costs $13.99 a month, so Disney is still cheap at $7.99 a month. In fact, there’s nothing stopping Disney from increasing its prices even higher in the future. Many consumers still think that Netflix is worth more, but as Disney builds out its offerings, that can change. And fast.
An eventual price to increase to, say, $11.99 would probably not be all that noticeable for Disney+ subscribers. But Disney would certainly notice; it would represent a 50% revenue increase for the segment. Moreover, Disney+ would still be $2 a month cheaper than the Netflix standard plan in that scenario.
What About Content Costs?
Though price increases won’t be an issue – at least for a while – content costs are a legitimate concern. Disney+ inflated its subscriber projections for 2024 – a welcome sight for investors. Investors weren’t, however, happy to see the content cost revisions.
The company now sees content costing Disney+ between $8-9 billion by 2024, roughly double the original $4 billion projection. We’ve seen a similar script play out with Netflix; the company has been forced to invest heavily in original content to keep subscribers happy.
This isn’t what you want to see, but the good news is that Disney+ projects to have enough long-term subscribers to cover content costs and turn a nice profit.
How to Play Disney
Disney+ has been one of the few bright spots for Disney in a year that has been marred by COVID-19. Some of the company’s famed theme parks have reopened, but social distancing requirements have prevented them from thriving. And other parks have been closed.
But Disney’s parks revenue should decisively recover in 2021, with pent up demand potentially taking revenue above pre-COVID levels.
Disney shares have been surging since the beginning of November and the fundamentals are in place to carry shares even higher as we move in 2021. You may get left behind if you insist on a pullback, so: consider biting the bullet and paying a premium on Disney shares – it could be well worth it.
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