Growth Stocks: Walt Disney Co

On Wednesday night, February 9, the management team of The Walt Disney Company (DIS.US) will release the company's financial performance for the first quarter of fiscal year 2022. As we get closer to that moment, investors will surely be keeping an eye on some key fundamental metrics. These are measures maintained by the company that help determine its recent performance and provide an idea of what kind of future the company offers. Quality performance on one or more of these metrics can indicate great prospects for the company.

Only one metric matters: Subscribers

One of the most attractive growth opportunities for Disney in recent years has been its streaming services. Once a small part of the business, streaming has become a huge business opportunity. At the pinnacle of this opportunity is Disney+, which the company launched just a couple of years ago. In record time, the service expanded, surpassing the 100 million subscriber mark in the second quarter of the company's fiscal year 2021. Recent performance, from growth from the third quarter of 2021 to the fourth quarter, indicated that some slowdown was taking place. After seeing the number of subscribers on the platform increase from 103.6 million in the second quarter of that year to 116 million in the third quarter, the number increased only 2.1 million to 118.1 million in the last quarter of 2021.

source: SEC EDGAR Data
 
It is important to note that if Disney continues to show a slowdown in the number of subscribers, but it is not the only one. Leader Netflix (NFLX.US) saw its share price drop by about 22% on January 21 this year after the company posted the increase of just 8.28 million subscribers to its platform. This narrowly missed the 8.5 million mark that the company's guidance had marked and that analysts were anticipating. Still, the platform rose to 221.8 million subscribers, up from 213.6 million seen a quarter earlier and compared to 203.7 million reported in the last quarter of 2020. But with Disney targeting between 230 million and 260 million subscribers at the end of its By fiscal year 2024, any continuation of the slowdown could seriously affect the investment prospects of the business.

source: SEC EDGAR Data

Outside of Disney+, we should also keep an eye on other streaming services that the company owns. His portfolio includes ownership of ESPN+ and Hulu. In the latest quarter for which data is available, ESPN+ reported 17.1 million subscribers, up from 14.9 million in the third quarter of 2021 and compared to 10.8 million in the last quarter of 2020 Hulu, meanwhile, has been growing at a slower pace, with the most recent sequential increase of around 1 million, bringing the number of subscribers for the business to 43.8 million in total.

source: SEC EDGAR Data

The number of subscribers is only half of the total. The other aspect is the price. In its most recent quarter, Disney+ revenue per user (number of accounts per subscription) per month averaged $4.08. That was down from $4.16 a quarter earlier, but was otherwise the highest mark for the company since the last quarter of 2020. Such a small move may not sound like much, but considering $0.08 additional revenue per month for each user, with 118.1 million users, that's an additional $113.4 million in revenue per year. More likely, ESPN+ will report another increase in median revenue per subscriber. It is important to note that the company has experienced a drop in prices for at least the last five quarters. And at the end of its 2021 fiscal year, the company reported revenue of $4.57 per user per month. Meanwhile, Hulu, due to the different pricing structure it offers, is something of a wild card, fluctuating in any given quarter. Regardless, all eyes should also be on the price of this service.

A quick view at the theme parks

In recent years, one of the weakest parts of Disney has been the operation of its theme parks. This makes sense when you consider the impact COVID-19 had on everything related to gatherings of people and crowds, albeit in open spaces. As an example, revenue associated with theme park admissions dipped to just $34 million in the company's third quarter of fiscal 2020.

Fortunately, a year later, it had rebounded, totaling $1,150 million. And in the last quarter of the company's fiscal year 2021, revenue came in at an impressive $1.55 billion. This compares to $383 million generated a year earlier.

source: SEC EDGAR Data

Another important source of income for the company would be the “Resorts and Vacations” operations of the business. In the worst case scenario, during the crisis, revenues here fell to just $80 million over the course of three months. But by the last quarter of 2021, it had recovered to $979 million. That was roughly triple the 314 million generated a year earlier. And also related to this would be the company's Merchandise, Parks Food and Beverage and Experiences departments. At its weakest, this unit's revenue hit $63 million in a three-month window. It finally recovered somewhat for the last quarter of 2021, with revenue totaling $1.27 billion. That's triple the 411 million experienced a year earlier.

While Disney is a large and diverse conglomerate, with many parts of the business doing extremely well during the recession, the company cannot truly flourish until all parts of its ecosystem are working properly. And with the omicron variant of the COVID-19 pandemic having a significant impact on the perceived safety of going out to places like a theme park, there is some uncertainty about what investors should expect from these business units. Investors would do well to see how this part of the business performs as it should be an indicator of the company's future prospects.

The debt could (should) be reduced again

The last big thing that I think investors should keep a close eye on is the company's leverage. At the end of the company's 2020 fiscal year, it had net debt of $40.71 billion. This increased to 41.21 billion a quarter later. Since then, however, management has done well to allocate excess cash flows to pay off some of this debt. Operating cash flow was just $95 million in the company's first quarter of fiscal 2021. This is probably why an increase in net leverage was observed. But every quarter since then has resulted in an improvement in cash flow. In the following quarter, operating cash flow was $1.39 billion. This amounted to $1.470 million in the third quarter of 2021 before reaching $2.610 million in the last quarter of the year. As a result of this, net leverage eventually fell, falling to $38.45bn by the end of 2021. All told, this was down $1.32bn during the third quarter of that year and year-over-year is down $2.27bn.

source- SEC EDGAR Data
 

Conclusions

Although in the long term the company represents an opportunity, in the short term and in anticipation of the results on February 8, we will have to be cautious and manage the risk appropriately. Disney continues to reduce its debt and most of its operations are doing well. Adding up the future potential associated with its streaming services and considering that the company's theme park operations will eventually recover, the company's situation will be much better in the coming years.

Technical analysis

Precisely, the report will be crucial for investors who, given an unfavorable technical context in recent months, in fact 2021 has been one of the company's worst stock years, they hope that analysts' estimates will not fail as happened with the results of Netflix (NFLX.US) recently.

source: xStation

The price is aligned with the main support at pre-pandemic levels and the context will depend on the publication of the earnings report that we will know wednesday night, after the close of the Wall Street session. So, wait and see.

Dario Garcia, EFA
XTB Spain