Introduction

Disney+ has emerged as a key growth driver for Disney, primarily driven by its solid content portfolio. The service offers nearly 700 movies and 11,700 episodes of television shows from brands such as Disney, Pixar, Marvel, Star Wars and National Geographic and Disney+ originals. Disney has an impressive line-up of big-budget movies slated to be released over the next couple of years, a number of which will appear on Disney+ simultaneously with their theatrical releases. The rapidly growing subscriber base should strengthen Disney's position in the increasingly saturated streaming space currently dominated by Netflix.

• Warning! GuruFocus has detected 3 Warning Sign with DIS.

Bull Case

Disney's expanding streaming service offerings Disney+, ESPN+, Hulu, Disney+ Hotstar (India, Indonesia, Malaysia and Thailand) and Star+ (Latin America) are expected to be major growth drivers in the long run. These services are driving Direct-to-Consumer (DTC) subscription fees that increased 13% year over year in the second quarter of fiscal 2024 that ended on Mar 31. Growth in core Disney+ subscribers and to a lesser extent, Hulu and ESPN+, were the key drivers. DTC subscription fees are expected to witness a CAGR of 9% between 2024 and 2027.

Disney's focus on sports streaming, particularly Live Sports, is expected to drive growth in the long haul. For instance, ESPN+ offers tournaments like UFC Lightweight Championship, Major League Baseball (MLB), National Hockey League (NHL), Major League Soccer, Grand Slam tennis, Italy's Serie A soccer and live sporting events, original shows, series and documentaries. Renewal of MLB sports rights deal through 2028 and agreement with Spanish club football's first division, La Liga, further strengthens Disney's sports content offerings. Disney also remains focused on offering content on linear television. In this respect, Disney and ESPN's recent long-term partnerships with National Football League (NFL) are noteworthy.

Rapid international expansion has been a key catalyst driving Disney+'s growth. In the past couple of years, Disney+ has been launched in India (through the Disney+ Hotstar service), through a strategic partnership with Canal+ in France, in Japan (via NTT DOCOMO) and several European as well as Latin American countries. Disney+ is currently available in more than 80 countries and territories outside the United States and Canada. The international expansions and a solid content portfolio have helped Disney+ garner a substantial subscriber base within a short period. Disney's new hub for international content creation supports the worldwide expansion of the company's direct-to-consumer business. This is expected to drive Disney Media and Entertainment Distribution (DMED) revenues, under which Disney+ is reported.

Recovery in the theme parks business is expected to drive Disney's prospects in the long haul. Latest attractions like the Frozen theme land at Hong Kong Disneyland and Walt Disney Studios Park in Paris, as well as the Zootopia theme land at Shanghai Disney Resort, are expected to boost the prospects of the theme parks business.

Bear Case

Disney is suffering from lower advertising revenues. In fiscal 2023, revenues declined 15% from the year-ago period due to fewer impressions primarily attributed to declines at Hulu and Disney+. The decrease in impressions at Disney+ was due to the lack of IPL cricket programming compared with the year-ago period. Moreover, Disney is focusing on its streaming business, which needs significant investment on content and marketing. The rising spending is expected to keep consolidated margins under pressure. Moreover, Linear Networks' profitability suffers from higher programming and production costs. Disney's recently theatrical releases have failed to ignite box office with unimpressive box office performances of The Marvels, Wish, Ant-Man and the Wasp: Quantumania and Elemental. Although Guardians of the Galaxy: Vol 3 did well, it is expected to not have been enough to drive Disney's box office performance in the near term.

Disney has a leveraged balance sheet. Total borrowings (including the current portion of borrowings) were $45.3 billion as of Dec. 28, 2024, compared with $45.81 billion as of Sept. 28, 2024. Disney's debt balance compares unfavorably with cash, cash equivalents and its current marketable investment securities balance of $6 billion.

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Conclusion

Disney+ is facing significant competition in the streaming market from the likes of Netflix and Amazon prime video. Netflix enjoys a first-mover advantage in the streaming market, and its solid original programming portfolio is a major differentiator. Amazon is also catching up. Apple TV+ is gaining recognition with Emmy and Oscar wins. Comcast's Peacock and Paramount Global's Paramount+ benefit from their huge libraries of movies and shows. Moreover, with the completion of the merger of WarnerMedia with Discovery, the competition is expected to get stiffer.