Disney's streaming outlook key question as quarterly earnings report nears

While Wall Street analysts anticipate that Walt Disney Co. will report slower direct-to-consumer subscriber growth during its Nov. 10 earnings call, key questions remain as to how much the growth slowed and whether that slowdown will change Disney's long-term streaming outlook.

After several quarters of triple-digit year-over-year growth for its Disney+ streaming service and its international counterparts, the red-hot growth rate is slowing amid content headwinds and expansion hiccups. Disney CEO Bob Chapek in September told investors that customer additions for the global direct-to-consumer segment would increase in the low single-digit millions in the current period, down from 12.4 million during the company's fiscal third quarter, which ended July 3.

Notably, the service's international cousins, Disney+ Hotstar in India and Star+ in Latin America, both are expected to report slow subscriber adds in the current period. In India, pandemic-driven schedule changes for key cricket events led to the roll off of a number of Hotstar subscriptions; while in Latin America, Star+'s additions were impacted by a two-month delay to its launch. The international headwinds coupled with production delays are expected to weigh on Disney's overall streaming growth.

Disney's other streaming services, Hulu and ESPN+, reported lower growth than Disney+ but also less volatility in growth rates for the year-to-date. Hulu finished the company's fiscal third quarter ended July 3 with a combined 42.8 million subscribers, up 20.6% year over year. Meanwhile, sports streaming service ESPN+ counted 14.9 million customers, up 75.3%.

Disney forecast that its Disney+ subscribers will reach between 230 million to 260 million range by the end of its fiscal 2024. By that point, Hulu is expected to contribute 50 million to 60 million customers to the direct-to-consumer segment, with ESPN+ bringing another 20 million to 30 million.

Wells Fargo analyst Steven Cahall in a recent research report lifted projections for the company's fiscal 2024 streaming tally to 245 million customers, down from 236 million earlier. For the near term, Cahall reduced his estimate of core Disney+ subscriber gains to 2 million for the just-ended quarter, reflecting core Disney+ additions at 3.5 million or more, weighed down by a loss of 1.5 million Hotstar customers.

Macquarie Capital cut its estimate on Disney+'s net adds in the fiscal fourth quarter to 3.5 million, which would put the service at just under 120 million total subscribers for the close of Disney's fiscal year 2021.

Future growth

Looking ahead, RBC Capital Markets analyst Kutgun Maral expects the slowdown in Disney+ net adds this past August and September to be more than offset by gains in the December period, which Maral said will benefit from market expansion in Japan and mid-November launches in South Korea, Taiwan and Hong Kong. The analyst also pointed to improved net adds for Star+ in Latin America as distribution picks up with local partners.

Morgan Stanley analyst Ben Swinburne forecasts that Disney+ subs will accelerate in fiscal 2022 relative to fiscal 2021 levels, amid new market launches in Asia Pacific Eastern Europe and South Africa, as well as the leveraging of key sports rights and a more consistent ramp-up in original productions.

A more cautionary note came from Barclays' Kannan Venkateshwar, who wrote that Disney needs to more than double its subscription additions in the quarters ahead to meet its long-term guidance. "We believe this may be tough to do," the analyst said.

Barclays lowered its estimates for Disney+ and Hotstar subs to about 200 million by Disney's fiscal 2024.