Disney (DIS) reported second quarter financial results after the bell on Wednesday that missed on both the top and bottom lines, although net additions for its fledging streaming platform Disney+ came in at 7.9 million, well above estimates of 4.5 million.
The surprise upswing caused shares to climb as much as 5% in after-hours trading; however, Disney quickly erased those gains during the company's earnings call in which CFO Christine McCarthy warned on both a tough economic environment as well as softer subscriber growth in the second half of the year.
Shares continued to decline into Thursday's session, down roughly 2% in midday trading.
Despite the beat, Disney's net subscriber additions still saw a deceleration compared to previous quarters.
The company added 11.7 million subscribers in the first quarter of 2022, sharply topping analyst estimates. On a year-over-year comparison basis, the media giant reported a net add of 8.7 million in Q2 2021.
The overall subscriber decline comes as inflation remains high, consumers cut costs, and competition intensifies. Analysts remain split on what those economic conditions mean when it comes to the longer-term prospects of Disney+.
"This is sort of a question about when does [the market] get too saturated?" Doug Creutz, senior analyst at Cowen, told Yahoo Finance.
Disney is "spending tons of money to grow Disney+," the analyst continued, noting the company's "fiscal Q2 was the second largest loss that that segment has had."
"Although the company has managed to grow subscribers, the question is, 'At what cost?'"
Creutz added that Disney+ "is at an earlier stage of growth" compared to competitors like Netflix, which lost 200,000 paying users in its most recent quarter (the first time the company had lost subscribers during a quarter in 10 years.)
Laura Hoy, equity analyst at Hargreaves Lansdown, agreed, saying that although investors breathed "a big sigh of relief" that Disney did not follow the same fate as Netflix, the media conglomerate "is in a much different space."
Disney+ is "quite early on in the journey. It's not facing those same roadblocks," Hoy explained.
Still, "we really can't knock them for what they're doing with streaming. They're definitely able to hold on to their subscribers and able to attract new ones."
"They've got that pricing power, and it looks like this is the streaming service that people are interested in, even though they can get out and do other things," she continued.
I still think in the long run that Disney+ can compete fine with Netflix...Doug Creutz, Cowen Senior Analyst
Disney+, which will open in 53 new markets in the the third quarter of 2022, has 137.7 million global subscribers to date, above expectations of 134.4 million.
The company reiterated its target to bring on 230 million to 260 million subscribers to the service by the end of fiscal 2024. For context, Netflix's subscriber count sits at 221.64 million global subscribers.
Beyond Disney+, the company will also lean on the theatrical rebound, with top titles like "Thor: Love and Thunder" and "Avatar: The Way of Water" set to debut later this year.
"I still think in the long run that Disney+ can compete fine with Netflix," Cowen's Creutz stated.
"It's just a question for both [Disney, Netflix] and all the other streaming businesses out there, 'What do the economics ultimately look like?'"
Disney's parks, experience and consumer products business swung to an operating profit of $1.76 billion in Q2 ·(Orlando Sentinel via Getty Images)
Disney's parks firing 'on all cylinders'
Although streaming has been a particular focus for investors, the company's theme park division has remained a bright spot in its pandemic recovery.
The entertainment mecca's parks, experience and consumer products business swung to an operating profit of $1.76 billion, surpassing expectations of $1.6 billion and just below last quarter's operating profit of $2.5 billion. Revenue for the segment came in at $6.7 billion, nearing its pre-pandemic total of $7.6 billion in the final quarter of 2019.
Unlike the shaky streaming side of the business, analysts remain fairly confident that Disney's sprawling theme parks — a consistently important element to the company's bottom line — will see continued robust growth amid the reopening trade. Chapek also doubled down during the earnings call, saying the parks segment, up 110%, is firing on "all cylinders."
"The theme parks have been great," Creutz told Yahoo Finance, explaining, "The trajectory of the recovery there from the pandemic has definitely been faster and stronger than I think anybody anticipated."
Hargreaves Lansdown's Hoy added, "The parks is a huge part of where Disney makes their money."
"What I thought was even more encouraging is operating income increased, and that was because volumes are up. So people were going and, not only that, but they were spending more at the parks than they had previously," she continued.
Still, possible headwinds include inflation impact and recession fears, although Hoy believes "people are willing to spend [on visiting the theme parks] despite inflation" as more Americas "are treating themselves" following pandemic lockdowns.
In a new note, Bank of America (BAC) reiterated its Buy rating on the stock, although it lowered its price target to $140 from $191.
The bank also lowered its full-year 2022 EPS target to $3.04 (from $4.26), citing "park closures in Asia, increased incremental DTC spending, headwinds in content licensing and a higher tax rate."
Disney's market cap has slipped to just over $182 billion, with shares falling more than 30% year-to-date.
Alexandra is a Senior Entertainment and Food Reporter at Yahoo Finance. Follow her on Twitter @alliecanal8193 or email her at [email protected]
