Disney (DIS) reported FY 3Q21 results that were better than expected for both financial metrics and subscriber additions. Long-term guidance was not updated since DIS is in the process of creating the operating plan for FY22. Given ongoing strength in DTC services – Disney+, ESPN+, and the recently profitable Hulu – and the ramping recovery at theme parks, live sports, and movie theaters, Northlake expects guidance and estimates to increase when the FY22 operating plan is announced.

Stock Reaction: DIS investors were pleased with the positive results; shares were up almost 5% during the day following earnings, and closed up 1%. The stock may be close to breaking out of the downtrend since March with the outlook improving for both traditional and streaming businesses. DIS may soon increase long-term guidance which could push the stock to new all-time highs.

Earnings Analysis: DIS parks returned to profitability sooner than expected thanks to exceptionally strong spending by visitors, even as slowly rising capacity limits are constraining attendance. The company announced an upcoming service called Disney Genie that will allow visitors to customize their experience using their smartphones and discover new attractions like the Star Wars Galactic Starcruiser hotel or Avengers Campus. Northlake expects FY22 results for parks will likely be better than FY19. On the DTC side, Hulu surprised positively by growing profitability more than expected thanks to very strong ad sales, boosting expectations for the outlook of the transition from linear cable and broadcast TV to streaming. Subscriber additions were strong across all digital services, and linear subscribers only fell 3% from 3Q20 which is an improvement from the -4% pace reported last quarter. DTC pricing grew while churn improved, implying that customers are happy with the value of the service and DIS has a long runway to increase prices. Last quarter, investors feared that 2H21 subscriber additions would be slower than 1H21, but results signal that DIS guidance was likely very conservative. The growth is impressive amid a period of intense competition for streaming services when peers have been underperforming estimates. DIS will expand DTC services to Latin America, Asia Pacific, and Eastern Europe regions over the next year. The return of live sports is helping drive subscription and advertising dollars across traditional and digital services, offset by rising sports rights expenses and marketing costs. For films, DIS plans to retain flexibility to use shortened exclusive theatrical windows, direct-to-DTC releases, and a hybrid approach as long as uncertainty from the pandemic remains. Green shoots at the reopening segments remain encouraging.

Target Price: DIS is on track with Northlake expectations and we are sticking with a $225 price target for upside of 25%. Both segments reported surprisingly positive results after a recent stretch of concern about subscriber growth and lingering pandemic impacts. If DIS announces updated long-term guidance for DTC, and parks and experiences continue to ramp quickly, Northlake could see upside beyond our target.

DIS is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.  DIS is a net long position in the Entermedia Funds.