The reopening of Walt Disney's (NYSE:DIS) theme parks and growth from its three streaming services (Disney+, Hulu, ESPN+) wasn't enough to push the stock higher in 2021. The stock price is currently down 14.5% year to date, trailing the 27% return of the S&P 500 index.
The parks segment has recovered well, with revenue nearly doubling year over year in the fiscal fourth quarter. But slowing growth from Disney's marquee streaming service, Disney+, caused the shares to slump toward the end of the year. Here's why the stock should bounce back in 2022.
Where Disney+ stands heading into 2022
The investment case for Disney hinges on the growth of Disney+, so it's understandable for the stock to trade in line with the rate of subscriber growth, but the market overreacted to Disney's results last quarter.
As Netflix (NASDAQ:NFLX) has demonstrated over the last 10 years, content releases lead to subscriber growth. Disney started off the year strong with the release of Marvel's Wanda Vision, The Falcon and the Winter Soldier, and Loki -- all original series released as Disney+ exclusives. Growth followed, with Disney adding 12.4 million subscribers in the third quarter ending July 3.
The fourth quarter was quiet for new releases, and as a result, subscriber growth slowed to 2.1 million subscriber additions. Like clockwork, the stock slid.
Market participants seem to have extrapolated one quarter's growth out into the future, which doesn't make any sense. Of course, analysts are measuring the company's performance against management's guidance that Disney+ will reach between 230 million to 260 million subscriptions by fiscal 2024. Disney has three years to double its subscribers, but that should be an easy layup given that Disney has gotten this far without having deeply tapped the rich content pipeline it unveiled a year ago.
Disney just began to tap into this pipeline in the last month. Remember, Disney previously announced 10 original series each from Marvel and Star Wars, along with 30 live-action shows from Disney animation and Pixar over the next few years. In November, Disney released Peter Jackson's Beatles documentary and Marvel's Hawkeye. But the big one was released on Dec. 29, a new Star Wars original series called The Book of Boba Fett.
Disney is ending calendar 2021 with a bang, but there is much more on the way that could be explosive for subscriber growth.
Disney's international plans
During the Q4 earnings call in November, Disney CFO Christine McCarthy reminded investors that they don't expect "[subscriber] growth will necessarily be linear from quarter-to-quarter." McCarthy is implying that subscription growth should follow the timing of new content releases.
On this note, Disney is nearly doubling the amount of original content from its top brands in fiscal 2022. Much of this content will come later in the year, as McCarthy said, "We expect Disney+ subscriber net adds in the second half of fiscal 2022 will be meaningfully higher than the first half of the year."
Disney's previous guidance for spending on content production was between $8 billion to $9 billion by fiscal 2024. Management said that range will now be higher, as they ramp up spending on local and regional content.
Disney is taking a page out of Netflix's playbook. The latter has expanded very successfully across international markets based on its focus on producing local language content. It's a bonus that some of these shows, such as La Casa de Papel (aka Money Heist) and Squid Game, have translated to high viewership in the U.S. and Canada too. Localized content can drive worldwide subscriber growth.
Disney CEO Bob Chapek mentioned that the company has over 340 local original titles in various stages of development and production across its direct-to-consumer platforms, which would include Hulu and ESPN+. These are planned for release over the next few years.
Streaming will add tremendous value to Disney
Adding all this up, the Disney+ service is clearly being undervalued by the market right now. The stock currently trades at just over 20 times Disney's peak earnings in fiscal 2018. But given Netflix's operating margin of 23.5%, Disney+ should be a major contributor to Disney's bottom line. Guidance still points to the service reaching profitability by fiscal 2024.
Moreover, Chapek's background at Disney suggests investors should look forward to margin increases across the business over time. This top entertainment stock should bounce back in 2022.