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Don’t believe that investors are irrationally short-term-biased, unwilling to let companies make sound investments that may take years to pay off. For evidence, consider what happened when trading in Walt Disney stock opened on Friday morning.
Shares had closed at about $154 on Thursday afternoon. On Friday morning they rocketed to $174, an all-time high. Only one explanation was possible: After trading hours on Thursday, Disney announced plans for its Disney+, Hulu, and other streaming services. When Wall Street analysts crunched the numbers, they concluded that Disney’s profits for fiscal 2021 (which ends Sept. 30) would plunge as a result. For example, Michael Nathanson of the MoffettNathanson research firm calculated that profits would be 30% less than he had previously estimated. The streaming services would lose $700 million more than they were already estimated to lose. And investors loved it.
It isn’t really surprising. Overall, Disney’s presentation was breathtakingly positive. When the company launched its Disney+ streaming service in November 2019, it told Wall Street it expected to reach 60 million to 90 million subscribers by the end of 2024. Turns out that with a strong boost from the pandemic, the service now has 87 million subscribers. The company’s new forecast for Disney+ by the end of 2024: 230 million to 260 million subscribers worldwide, a result of continued U.S. growth and more aggressive global expansion.
The company didn’t just promise big numbers. It explained how it would reach them, detailing what Cowen analyst Doug Creutz called an “enormously impressive array of new content”—movies and series like the Star Wars–based Mandalorian series that has been a huge hit on Disney+. By 2024, Disney expects to be spending $14 billion to $16 billion a year on programming exclusive to its streaming services. That’s more than analysts were expecting, prompting them to cut forecasts of profit and free cash flow, a measure that many investors consider even more important than profit. Yet investors didn’t mind; they could see how all that investment is meant to pay off.
Investors tend to give Disney the benefit of any doubts because it has been managing for the long term for a long time and has built a record of credibility. Former CEO Bob Iger began assembling a content colossus in 2006, a year after he became chief, when he bought Pixar (Toy Story, Cars), followed by Marvel (Avengers, Spider-Man) in 2009, Lucasfilm (Star Wars) in 2012, and 21st Century Fox (Terminator, Bohemian Rhapsody) in 2019. He was accused of overpaying for all of them, but in retrospect they all look like bargains. So when Disney told Wall Street in 2019 that its streaming services would lose billions for years but would eventually become profitable after 2024, investors tended to believe it.
It doesn’t hurt that, though Iger handed the CEO job to longtime Disney executive Bob Chapek this past February, Iger remains executive chairman, which means he’s still the boss.
Only a year ago, the entertainment industry and the analysts that follow it were talking about the advent of “the streaming wars,” a melee among Amazon, Apple TV+, Disney+, HBO Max, Netflix, Peacock, and others. Now it looks more like a two-horse race, Netflix vs. Disney, with the others fighting for a distant third place or even for survival. Total worldwide subscribers to Disney streaming services (Disney+, Hulu, and ESPN+) “are now expected to hit 300–350 million…in fiscal year ’24,” Macquarie analyst Tim Nollen wrote. “This compares with our estimate for Netflix of 295 million global subs.” No other player would now seem able to approach those numbers.
Competing will only get harder for the also-rans. Nathanson’s conclusion: “The sheer size and quality of the content tsunami headed to Disney+ was mind-blowing and frightening to any sub-scale company thinking about competing in the scripted entertainment space.” That’s why the stock is at a new all-time high.
All of which is a reminder to CEOs and directors who complain that investors won’t let them pursue a visionary strategy: Maybe the problem isn’t the investors. Maybe it’s the strategy.