He assumed the role of CEO for one of the world’s biggest entertainment companies on February 25, 2020.
Nearly one year later, the leadership of The Walt Disney Company by Bob Chapek is getting praise from one of the top financial analysts on Wall Street.
Only, it’s not so much for Disney+ and Hulu growth, along with international OTT consumption that excites Michael Nathanson. Rather, it’s theme park revenue that’s eye-popping to him.
Bob Chapek’s Magic Kingdom that is Disney under his leadership appears to be a bigger success than anyone on Wall Street, including the Senior Analyst at MoffettNathanson, imagined.
That’s because Disney’s fiscal Q1 2022 results are in stark contrast with its fiscal Q4 2021 performance. With the release of that financial health report, Disney “meaningfully missed” MoffettNathanson’s Q4 2021 revenue and EBIT estimates. The company had also warned about its near-term profit outlook and all-important Direct-to-Consumer subscriber momentum.
In response to that report, MoffettNathanson “significantly cut” its fiscal 2022 EBIT estimates for Disney “with across the board reductions in profits.”
Then came a SEC filing from Disney disclosing their decision to invest some $33 billion in content during fiscal 2022, compared to $25 billion in fiscal 2021. The announcement came alongside “weak” fiscal Q1 2022 subscriber guidance from Netflix, which temporarily torpedoed stocks in the OTT subsector.
Yet, Disney+ is showing signs of life, with Secrets of Sulphur Springs cleared for a third season and feature films including Encanto enjoying strong audience response beyond in-cinema screenings. Furthermore, Hulu and ESPN+ are attracting consumers, while Disney’s international OTT offerings continue to magnetize viewers.
Then came the “massive surprise” from Disney late Wednesday, even with lackluster results from its linear networks.
The theme parks are the driver, and Nathanson is amazed at the performance. In an investor note distributed Thursday, he said, “When we reflect about the massive surprise that Disney delivered in Fiscal Q1 2022, we are primarily focused on the incredible beat in Parks profits that came from the most amazing set of drivers that we have ever seen. Consider this: from the September quarter (Q4 2021) to the December quarter (Q1 2022), domestic park revenues increased by $1.33 billion while domestic park profits increased by a nearly identical $1.31 billion. In other words, in a period of rising inflation, the domestic park business added zero incremental costs as revenues surged. The recovery was driven by a stunning rebound in both volume and price.”
In short order, Disney’s domestic parks are back to 2019 levels and poised to put up “a massive recovery in profits” over the next three quarters.
While the Parks segment will drive the earnings revisions for Disney, will the DTC results cause a further re-rating in the shares? Here, MoffettNathanson is less convinced. “DTC revenue growth of 34% was just slightly (-100 basis points) below our forecast,” Nathanson said. “Two million of these subs were driven by an automatic bundle with Hulu Live and another 2.6 million came from Hotstar, which we tend to ignore given the $1 monthly RPU. Netting that out, despite more markets to pull from, the 7.1 million in quarterly adds was about 60% of the net subscriber additions of the same quarter last year. With Fiscal Q2 2022 expected to be down from this 7.1 million net subscriber rate, our second half estimate is assuming 15 million during the April to September time frame, which have been historically seasonally slow months to add new SVOD subscribers.”
To MoffettNathanson, the biggest DTC surprise is the drop in Hulu SVOD RPU from $13.51 in fiscal Q1 2021 to $12.96 this quarter. It was driven by slower Hulu ad revenues per user and Black Friday price discounting that added lower RPU subscribers. “By our math, the growth in Hulu SVOD revenue has now slowed to low teens revenue growth,” Nathanson said. “It will be interesting to see if this deceleration and ad weakness is systematic to the AVOD/SVOD hybrid market.”
Still, those concerns are dwarfed by the theme parks business. As such, MoffettNathanson is raising its FY 2022 EBIT by $500 million (4%), led by the upside at Disneyland and at Walt Disney World. It is also hiking Disney’s total company revenue estimate by 1% to $85 billion again, and raising its FY 2022 segment EBIT estimate to $13.3 billion “due to a much faster snap back in profitability” at the parks.
Unfortunately, this is offset by lower EBIT at DMED driven by $465 million negative revision at DTC.
Lastly, MoffettNathanson updated its pricing model and is maintaining its Neutral rating for DIS, along with its $165 target price.
At 10am Eastern on Thursday, DIS was priced at $156.50 and rising, with more than a 6% climb on strong volume.
