Theme parks are driving Disney’s post-pandemic recovery. Disney is seeing a massive rebound in its theme parks and tourism business, which includes Disney experiences and consumer products. Revenue for 2QFY22 doubled YoY to $7.2b. While the massive rebound largely came from local theme parks in the US, not all of its international parks have been fully opened in 2QFY22. For example, Shanghai Disneyland was temporarily closed as the Covid situation in China intensifies. Moving forward, the reopening of country borders for its Asian (Japan/Shanghai/HK) parks business present further earnings potential to be realized from next year. Parks are also poised to benefit from the return of park character meet-and-greets, the Nighttime Spectaculars at the Disneyland Resort, and the opening of a new attraction Guardians of the Galaxy.
Direct-to-Consumer (DTC) – positive on Disney+. In 2QFY22, Disney+ added 8m new subscribers to reach a global subscriber base of 137.7m (up 33% YoY). CFO Christine McCarthy said that the firm expects higher net adds in 2HFY22 vs 1HFY22. There is a concern among investors that subscriber growth could dwindle as "streaming wars" intensify. However, management still guides for Disney+ of 230-260m subscribers by FY24. Given Disney’s success with its ad-supported tier for Hulu, the inclusion of ad revenue in lower tiers of Disney+ later this year for domestic subscribers in the US and internationally in 2023 appears to be a low risk and high reward strategic move.
Valuation/Recommendation. We believe investors have been too focused on the maturing of the streaming market (NFLX’s slowdown) and have overly discounted Disney’s Parks business. Disney is trading at 20% below pre-pandemic levels. Its current valuation of 19x FY23F earnings is attractive with its suite of content and film franchises as well as 20% EPS growth for FY24. Investors who are bullish on Disney may also consider a direct purchase of the stock.