Disney - Lunar Capital

The Legacy of Disney

Last week, Disney released its Q1 2025 financial results, reporting a 7% year-over-year increase in total revenue to $23.6 billion. This growth was primarily driven by the entertainment segment, which includes both linear television and direct-to-consumer (DTC) services. Operating income rose 15% year over year to $4.4 billion, mainly due to a sixfold increase in operating income from the DTC business.

Despite the growth in streaming, Disney continues to face challenges in its linear network segment, where revenue has been declining as audiences shift toward digital platforms. However, linear TV remains a major contributor to profitability, generating over 61% of the entertainment segment’s operating income. In contrast, the DTC segment, while rapidly growing, currently contributes just over 26%. Competitors like Netflix and Amazon, which entered the streaming space earlier, have been able to capture market share from traditional media players like Disney.

A key strength for Disney lies in its library of intellectual property, which has been developed in-house development and through acquisitions. This content portfolio fuels multiple revenue streams across its business segments.

One of the most effective ways that Disney monetizes its IP is through its Parks and Experiences division, which includes theme parks around the world. This division generated $8.9 billion in revenue—up 6% year over year—and $2.5 billion in operating income, a 9% increase. Notably, this division accounts for more than 55% of Disney’s total operating profit.

Looking to further expand its global footprint, Disney recently announced plans to open a new theme park in Abu Dhabi. While Disney will lead the design of the park, construction will be funded by local partners. In return, Disney will receive a share of the revenue generated by the park.

The Parks and Experiences segment may be particularly vulnerable in the event of an economic downturn. A potential recession could dampen consumer spending on travel and leisure, impacting park attendance and profitability.

Disney also faces intense competition in the entertainment space. Netflix is singularly focused on its core DTC business and does not have to manage legacy media operations or a theme park division. This focus may give Netflix a strategic advantage as the media landscape continues to evolve.

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This stocktake is prepared for the clients of Lunar Capital (Pty) Ltd. This stocktake does not constitute financial advice and is generated for information purposes only.

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What’s Up Walt

Weekly Stocktake / By VCS Agency

The Walt Disney Company holds a diverse portfolio of brands and assets. These include Disney, Marvel, Star Wars, Pixar, 21st Century Fox, sports broadcaster ESPN, and Disney Experiences. Since the onset of the pandemic, Disney has faced challenges in maintaining its previous level of success. The segments have not always done well simultaneously.

Disney’s multiple business segments that drive the revenue for the company:

Experiences – includes their theme parks and Disney cruises.
Entertainment – includes their streaming platforms, linear tv assets, and box office hits .
Sports – includes their ESPN assets.

During the Covid pandemic, Disney’s streaming service, which was in its early stages, contributed to the company’s growth. The strategy was to leverage its extensive catalogue of creative and entertainment Intellectual Property (IP) to attract more users to its brand and transition users from its traditional linear television business to a more streaming-focused model.

Its Direct-to-consumer business (DTC) which includes Disney+ and Hulu, currently have just under 175 million paying subscribers globally. Average revenue per user (ARPU) per month in the United States for Disney+ is $7.70, compared to Netflix, which has an ARPU of $17.06. Netflix’s streaming service also boasts 282 million subscribers globally, over one hundred million more than Disney’s streaming platform.

Growth at Disney for its DTC business has slowed significantly since the peak during the Covid period. Revenue for the quarter for its DTC business increased by 16% to $5.8 billion. A notable development is that Disney’s operating income for their DTC platform was positive at $0.3 billion for the current quarter, an improvement from a peak loss of $1.5 billion in Q4 2022.

Disney’s parks and experiences business had the highest operating income among its segments, reaching $1.7 billion for Q4 2024. The segment performed well following the COVID-19 pandemic due to increased demand. However, with consumers facing financial pressure, the experiences business saw a year-over-year growth of only 1%, totalling $8.2 billion for the the quarter.

Disney’s CEO Bob Iger has stated that the current focus of Disney is to return creative control to their various brands and segments. He asserts that producing quality content for audiences encourages engagement with related content, whether from their streaming platform or their experiences business. It remains to be seen if Disney can effectively compete across all its business segments in the extremely competitive entertainment industry.

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Disney – Where’s the Magic?

Weekly Stocktake / By VCS Agency

Disney, once the vanguard of the entertainment industry, now faces the challenge of overseeing its various business divisions. From linear networks to streaming, theme parks to cruises, and sports to merchandise; Disney is trying to sustain its established cash cows while simultaneously investing in and nurturing the growth of its other ventures. But in doing so, it has been burning through cash, fighting boardroom proxy battles, and losing clout with consumers.

For Q2 2024, revenue for Disney increased by 1.3% to reach $22.1 billion. And operating income increased by 15% to reach $3.8 billion. Direct-to-consumer, which includes streaming services such as Disney+ and Hulu, posted its first ever quarterly operating profit, which was $47mn. This was driven by cost-cutting that Disney has implemented in their operations and content spend. Hulu programmes such as “The Bear” and “Shogun” drove the new signups to Disney’s streaming services. Disney’s experiences segment, the cash cow, generated $8.4bn in revenue, with an operating profit of $2.3bn for the quarter. Disney noted that they expect sales for their experiences segment to drop during the year, as the pent-up demand for experiences, built up during the Covid Pandemic, subsides.

Under Bob Chapek’s (Disney’s previous CEO) tenure, Disney has poured substantial resources into productions across its various studios: Marvel, Pixar, Star Wars, and Fox. However, many of these endeavours have failed to replicate the box office triumphs of previous years, particularly during Marvel’s illustrious heyday. These productions were intended to serve as the cornerstone for Disney’s streaming services to flourish, but the over expansion lead to disappointing figures.

During the earnings call, Disney acknowledged that Netflix has established the gold standard for streaming. Netflix consistently leads the industry, often pioneering new features, such as the recent crackdown on password sharing, a move that has proven effective in recouping lost revenue. Netflix have been what other streaming services are trying to replicate. However, If you were to ask about Netflix’s primary competitor, Netflix would likely point to YouTube. Netflix has previously hinted at this perspective. YouTube’s exceptional consumer engagement aligns with Netflix’s preferred focus of measuring the duration of viewers’ attention on screen.

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