Walt Disney (NYSE:DIS) reduced the losses at its streaming (direct-to-consumer) division in the fiscal second quarter (ended April 1, 2023) by 26% year-over-year to $659 million, thanks to the company’s decision to raise subscription prices and its efforts to reduce costs. However, shares declined nearly 5% in Wednesday’s extended trading session, as investors were disappointed with the sharp drop in subscribers in the quarter.
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Decline in Disney+ Subscribers
The company’s Disney+ service lost 4 million or 2% paid subscribers in Q2 FY23, ending the quarter with 157.8 million users. Analysts were expecting the Disney+ subscriber count to come in at 163.5 million.
The decline in subscribers was mainly due to an 8% quarter-over-quarter fall in Disney+ Hotstar subscribers to 52.9 million. The loss of Indian Premier League cricket rights likely impacted the Hotstar service in India. Further, North American Disney+ subscribers dropped 300,000 to 46.3 million. ESPN+ subscribers increased 2%, while Hulu’s subscriber count was essentially flat on a quarter-over-quarter basis.
An increase in prices drove a 13% rise in global Disney+ average revenue per paid subscriber to $4.44, with a decline in the metric for Disney+ Hotstar being more than offset by a 20% rise in North American average revenue per user.
During the fiscal Q2 earnings call, CEO Robert Iger said that the loss of subscribers to the company’s “substantial” pricing hike for the non-ad supported Disney+ offering was “de minimis.” The company expects the “softness” seen in Q2 domestic Disney+ net additions to continue in Q3 FY23. That said, it expects core subscription growth to rebound in Q4 FY23.
Disney and other streaming service providers like Netflix (NFLX) have been under pressure to improve profitability, given the billions of dollars invested in the streaming platforms. However, macro pressures and intense competition in the streaming space are impacting profitability.
Looking ahead, Iger announced on the earnings call that the company would bundle Hulu+ with Disney+ into one app later this year. The CEO believes that this integration will help boost advertising and engagement and reduce churn.
Is DIS a Good Stock to Buy?
Disney’s Q2 FY23 revenue increased 13% year-over-year to $21.8 billion, but adjusted EPS declined 14% to $0.93. Both the key metrics were in line with analysts’ estimates.
Following the results, Citigroup analyst Jason Bazinet reiterated a Buy rating on DIS stock with a price target of $130. The analyst believes that the lower Q2 FY23 subscribers and improved direct-to-consumer segment profitability were likely the results of the price hikes implemented in December. Bazinet thinks that shares might modestly rise today, given the narrowing of streaming losses.
Overall, Disney scores a Strong Buy consensus rating based on 10 Buys and three Holds. The average price target of $128.64 implies 27.2% upside.
