Investors have bid up Disney (NYSE:DIS) shares since the company officially unveiled its new internet video offerings on Thursday. DIS stock spiked that day and have gained more than 12% as the market mulls the promise of Disney+ streaming.
But even under the most optimistic scenarios, the company’s internet video products won’t be profitable anytime soon. Disney’s streaming offerings will, in all likelihood, never generate nearly as much revenue as the company’s current media networks, and DIS will likely face a choice of either losing a great deal of money on them or gaining very few subscribers. So until the streaming sector consolidates, Disney+ will probably only put pressure on its bottom line, tamping gains in Disney stock.
With that forecast in mind, here are four reasons why the recent streaming-related DIS stock gains are overdone:
Even a Big Bull Doubts Profit Anytime Soon
JPMorgan analyst Alexia Quadrani believes that Disney’s new entertainment internet video offering, Disney+, will “ultimately” have “as many as 160 million subscribers worldwide,”versus Netflix‘s (NASDAQ:NFLX) total, as of the end of last year, of 139 million subscribers, Barron’s reported early last March.
Given that Quadrani — bullish on DIS stock for most of the past seven years — says that Disney+ could have many more subscribers than NFLX, which has a first-mover advantage and has become extremely popular, I’d say she’s very upbeat on the service’s prospects.
And yet, Quadrani, who says she has “confidence in the resilient success of Disney+,” predicts that the service will lose money until 2022, when, she expects it will break even.
If she thinks that Disney’s most wide-ranging internet video offering, which will include its most recognizable brands, won’t break even until 2022, it’s safe to assume that she expects its other two internet video offerings, ESPN+ and Hulu, to lose money for an even longer time. In all likelihood, if investors see that the new offerings will be unprofitable for some time, they will become less enthused about Disney stock.
Other analysts have put dollar figures on the amount that they expect DIS to lose on the streaming services in the medium term. MoffettNathanson analyst Michael Nathanson expects the services to lose $3.9 billion this year and $4.9 billion in 2020,, and Bernstein analyst Todd Juenger says the losses will be higher than that, assuming that the company tries to sell its streaming services overseas.
I don’t think that the Street will be as upbeat on DIS stock when Disney starts actually reporting those losses.
DIS Internet Video Won’t Ever Generate as Much Cash as Old TV
Data indicates that Quadrani’s subscriber estimates could be overly optimistic.
In 2017, a poll quoted 36% of 18-to-29 year-olds as saying “they were likely” to subscribe to a Disney entertainment streaming service.
But since then, competition in the sector has increased and is expected to continue to do so. (See below). With the stepped-up competition, millenial consumers have become frustrated with the large number of choices they have. That frustration will only increase as even more companies, like Apple (NASDAQ:AAPL) and AT&T‘s (NYSE:T) Time-Warner, enter the fray.
For the sake of argument, let’s say that 25% of millennials wind up actually subscribing to Disney+. Given the high appeal of Disney’s sci-fi and animation-heavy content and streaming to that age group, a higher percentage of them than Americans overall are likely to subscribe to the service. (I can’t see many Baby Boomers or even “empty nesters” in their late 40s or 50s subscribing to Disney+).
Assuming that 15% of American households subscribe to Disney+, at its current price of $70 per year, that equates to total annual revenue of $1.3 billion. Assuming that another 100 million overseas subscribe, at the same price, that equates to another $7 billion. If Hulu generates a third as much revenue for DIS as Disney+ in the U.S., and 25% as much overseas, it will bring in around another $2.7 billion.
Let’s say that ESPN+ also brings in 33% as much revenue as Disney+ in the U.S., and, given foreigners’ preoccupation with their own local sports, only 10% as much revenue overseas. That would add another $1 billion to Disney’s coffers. That comes to a grand total of around $12 billion per year for all three streaming solutions, and I don’t think that level will be reached until 2022 at the earliest.
In 2018, Disney’s media networks generated $24.5 billion of revenue. So internet video in 2022 would generate about half as much revenue for DIS as Media Networks did in 2018, under fairly optimistic scenarios. So if 50% of Disney’s old media revenue goes by the wayside in three years as cable and broadcast TV become less and less prevalent, the company’s top line will remain unchanged.
Some will argue that DIS will be able to raise its subscription prices meaningfully by then. Given the steep competition it faces, I doubt that will be the case. But let’s say it raises its prices by 30%, and the revenue from its old Media Networks still declines by 50% in three years. Under that scenario, its media top line will have risen by a grand total of 15% over five years. Should a 15% increase over five years really make investors excited about DIS stock, especially when Disney’s streaming services at that point, under the best-case scenario, will barely be profitable?
According to techradar, “Disney+ plans to have four to five exclusive TV shows and four to five original movies ready for the late 2019 launch.” By contrast, Netflix plans to have dozens of new shows and movies coming out in just April and May of this year.
When it comes to content on Disney+ and Hulu, it appears that DIS will have a horrible choice: spend almost as much on new content as Netflix and have its online video service lose billions of dollars every year like NFLX does, but have tens of millions of subscribers like Netflix, or have mostly old films and reruns of old shows and become a niche content provider for around 15 million parents of small children and sci-fi and animation enthusiasts. Put another way, it’s hard to imagine many more than 20 million households around the world shelling out money for a streaming channel that consists primarily of TV reruns, old movies, and current Disney Channel and ABC fare. So DIS and the owners of DIS stock face an unappetizing choice: very high content costs or relatively low revenue. Either way, Disney+ won;t be profitable.
Competition Is Fierce And Getting Fiercer
I’ve written about the tremendous competition in the internet-video market many times. In addition to Netflix and Amazon, Dish (NASDAQ: DISH) ,Roku (NASDAQ:ROKU), and Plex have offerings in the sector, Two more big kahunas — Apple and Time Warner — will enter the race soon. And Hulu and Disney+ could even wind up stealing each other’s users.
I doubt whether most households will want to pay for more than two or three of these services. Given Netflix’s first-mover advantage and the plethora of strong competitors, that means the other services probably have a ceiling of 40 million U.S. households. That, in turn, is more bad news for the outlook of Disney stock.
As of this writing, the author did not own the stocks of any companies mentioned in this article.