The broader markets are looking to end this volatile week on a higher note, but one stock that is noticeably lagging this morning is Disney (DIS) .
The weak action in the stock does not come as a complete surprise as the shares fell in after-hours trading Thursday following the company's fiscal second-quarter earnings report, which you can read about here.
Although Disney once again showed that its overall business is far more profitable than what analysts had projected (adjusted earnings per share of $0.79 handily beat estimates of $0.27), what gave investors some concern was a disappointing miss on Disney+ subscriber growth. Even though paid subscribers of 103.6 million missed the consensus estimate of 110 million, management remained very bullish about the longer-term outlook as they backed their target of 230 million to 260 million paid subs by the end of FY 2024.
In addition to the subscriber count, the ARPU (average monthly revenue per paid subscriber) had a bit of noise to it too. But after digging into the numbers further, it was pretty clear to see how the results were diluted by COVID-19 related pressures in India. More importantly, management did not see any significantly higher churn rate in the U.S. after implementing the product's first price increase. What this suggests to us that the product has become "sticky" in households and that the higher price point will hold. With content creation ramping up over the next few years and Disney launching its service in even more markets, we have very few concerns about the long-term subscriber growth trajectory and APRU trends.
Outside of streaming, we believe today's selloff overlooks how encouraging the trends are at the Disney Parks. All of Disney's re-opened parks are running at or near their reduced capacity levels, and the pent-up demand is real here based on management's comment of how customer intent to visit Walt Disney World is back to flat against 2019 levels. And we believe attendance is about to get even better based on new mask guidance from the CDC. The organization said Thursday that fully vaccinated people no longer need to wear face masks indoors and outdoors in most settings.
We believe Disney's parks will be a major beneficiary of the CDC's upgrade view as it sets the stage for more easing of capacity and social distancing restrictions. It's also a great bit of news from an overall customer experience standpoint because who likes to wear a mask outdoors in the heat? In short, the updated masks guidance will boost the customer experience of the theme parks to an even higher level, leading to even greater attendance figures and higher spending by visitors.
Overall, we would overlook the Disney+ miss this morning because the long-term trend remains firmly intact. Although the stock is not cheap on a current earnings perspective, profits are expected to get a huge lift in the coming quarters from the strengthening reopening of the theme parks. We would not rule out the possibility of the parks operating at a new, higher-margin level based on management's focus on cost management.
We downgraded DIS to a Two back in early March when we trimmed our position at about $200 per share in our Alert here. With the stock now trading at about $170, or 15% lower since our sale/downgrade and down about 5% year to date, we believe we have seen enough of a pullback to get more opportunistic in the name.
We think this morning's pullback is one worth buying, and we will upgrade our rating back to a One.