Disney's Terrible, Horrible, No Good, Very Bad Year is Finally Over... But What Happens Now?
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Speaking of birthdays, The Walt Disney Company hits the century mark in 2023. And, if nothing else, it’s hard to believe that the coming year could turn out any worse than the last. (Of course, never say never.)
In 2022, the bottom fell out for the Mouse. Disney stock cratered by almost 44%, which ranked as its biggest loss in nearly fifty years. Not good.
As a longtime Disney fan (and shareholder), I’ve got some thoughts…
This collapse was long overdue. Oddly enough, Disney never really suffered during Covid-19. Sure, its stock price plummeted in March 2020 — like everyone else — but then quickly boomeranged and shot up 130% over the next year.
For a minute, with DIS 0.00%↑ closing as high as $197 in March 2021, it looked like Disney might come out the other side of the pandemic in better shape than ever.
Wall Street’s optimism, though, never made much sense. Covid crushed Disney’s business lines from every angle — the theme parks were shut down, ABC/ESPN sporting events postponed, movie theaters shuttered, film productions delayed or canceled, and cruise ships indefinitely docked.
Every proven profit lever available to Disney was wrenched into the off position almost overnight. And, then, left that way for months on end.
That left the nascent Disney+ streaming service as the only fully-functioning piece of the company. Which was nice from a growth perspective, but didn’t do much for the bottom line. As we’ll see in a minute, the economics of streaming can get pretty grisly.
Disney’s stock price was artificially propped up in 2020 and 2021 by the sugar rush of streaming dreams. And, like most sugar rushes, the ensuing crash eventually proved worse than the high. Disney ended 2022 down in the mid-$80s near its Covid-era lows.
Streaming dreams (temporarily) turn sour. The years leading up to 2022 were exciting ones for any company running a streaming service. Dreams of home entertainment dominance, a gaudy valuation multiple, and recurring (steadily rising) monthly subscription fees danced in Mr. Market’s head.
And, to be fair, it’s easy to fall in love with the promise and potential of Disney+.
The streamer launched in November 2019, just a few months before worldwide lockdowns and quarantines left us all cooped up inside with nothing to do. Add in Disney’s marketing machine, an incredible library of beloved legacy content, and the Baby Yoda craze — and it’s little surprise that D+ shot out of the gate like it did.
In just three years, the streaming service grew from nothing to over 164 million subscribers. Extremely impressive numbers.
But not terribly surprising.
Few companies can boast a collection of intellectual property comparable to Disney’s. There will, undoubtedly, be consolidation in the streaming wars in the years ahead — but Disney should have little trouble ensuring that it’s one of the eventual winners. Mickey Mouse, Star Wars, Marvel, et al. will make sure of that.
Getting there, though, won’t be pretty. Disney’s streaming segment lost $4 billion in 2022, with $1.5 billion of that coming in the fourth quarter. That’s nearly as much as the company lost on streaming ($1.68 billion) in all of 2021. Not only is Disney bleeding cash on streaming, but the problem seems to be getting worse as time goes on.
The culprit is clear: D+ content costs ballooned to over $5 billion (an increase of 72%) last year. And that’s not including ESPN+ or Hulu. Add those in and total content spend reached an eye-watering $14 billion in 2022.
Maybe this is a case of it being darkest just before dawn, but those numbers do not make for happy reading over at Disney.
If you need a TL;DR for why DIS 0.00%↑ lost 44% last year, there's your answer.
Fair enough, but don’t throw Disney+ out with the bath water. Owning a streaming service might not be the golden ticket to easy money that it appeared to be back in 2020/21, but that doesn’t mean it’s not the future for companies like Disney.
Sooner or later, streaming will be the dominant form of home entertainment. And, while building out (and populating) Disney+ might be a drag on the company’s stock price right now, it’s hard to argue with that decision. Disney MUST make sure that it has a seat at the streaming table whenever the music stops.
In an effort to strike the right balance between keeping subscription fees low (thereby fueling more growth) and maximizing profits (which require higher monthly prices), Disney recently made two big moves:
Launching an ad-supported tier of D+ for $7.99 per month
Raising the price of premium (no ads) D+ by 38% to $10.99 per month
Time will tell whether or not this worked as intended — creating a new, low-cost option for cost-conscious customers, while beginning to raise premium prices up to Netflix-like levels.
Disney’s other streamers are no slouches, either. Both Hulu and ESPN+ earn a higher amount of average revenue per user than Disney+ (mainly because D+ gets dragged down by super-low numbers from its international Hotstar brand).
The two “secondary” streaming services also combine for 71.5 million subscribers. Not bad at all.
Bob Iger’s encore. With Disney flailing, it wasn’t that surprising to see CEO Bob Chapek unceremoniously ushered out the door in November.
The timing of the move doesn’t exactly instill a ton of confidence in the company’s board of directors — who unanimously extended Chapek’s contract just months before — but the decision to bring back former CEO Bob Iger was roundly cheered by fans and shareholders alike.
I won’t pretend to know how Iger’s second stint atop Disney will go, but I certainly hope that he provides a much steadier hand at the wheel. Chapek made numerous gaffes, from political missteps to saying the quiet part out loud when bemoaning the “unfavorable attendance mix” of Disney Parks annual pass holders.
Believe me, no one shed a tear when he got the boot.
Iger, on the other hand, is part-politician and part-CEO. He says the right things at the right times and (mostly) avoids controversy. Just look at how he nimbly dodged and sidestepped volatile questions at his first town hall meeting back at Disney on November 28. If Chapek was like Velcro for bad press, Iger is pure Teflon.
And the man has an impeccable sense of timing. Iger stepped down as Disney CEO like five minutes before Covid hit the United States in 2020 and now returns like a conquering hero to replace a hugely-unpopular CEO just as Avatar: The Way of Water smashes box office records (and possibly vindicates his pricy Fox acquisition).
Iger’s unique position as both a Disney insider and outsider could also pay dividends in the streaming wars:
If nothing else, Iger’s return has lifted a pall off Disney and has the beleaguered company dreaming of happier days.
Never bet against Disney. The short-term outlook for DIS 0.00%↑ is pretty fuzzy. The company's stock might sharply rebound in 2023 or remain stuck under financial storm clouds for many quarters to come.
As a buy-and-hold investor with a time horizon of (hopefully) decades, the when of Disney’s recovery doesn’t much matter. But, having said that, it will probably happen sooner than people think.
Take the company’s cash cow Disney Parks segment, for instance. DPEP (Disney Parks, Experiences, & Products) earned $7.9 billion in 2022, which is 18% higher than the pre-pandemic era. The Parks were closed for months by government fiat, reopened with strict attendance limits for even longer, and have still become more profitable than ever.
It’s really, really hard to keep Disney down. Always has been and always will be.
For whatever reason, Disney IP doesn’t get old and stale. Audiences today clamor for Mickey Mouse and Snow White just as much as they did back before World War II. Disney boasts a timeless staying power that no other entertainment company can match.
Charlie Munger once described Disney’s ability to use the same characters and stories dreamt up in the 1920s and 1930s (and in every decade since) over and over again as akin to “an oil company that can put the oil back in the ground after it's done drilling, so it can drill again”.
It’s good to be the Mouse.
Some interesting thoughts as we prepare to give them quite a lot of our money (again).
Well thought through. Thanks.