The Walt Disney Company (DIS) blew past analyst estimates for its earnings recently and reported stellar growth across all segments of its business. Investors and analysts lauded the company's achievements, accomplished in difficult circumstances, and pushed its stock price higher.

During a time of unprecedented change in the media industry, growth to Disney's business mainly rest on two pegs: its streaming service and new entertainment experiences at its Parks, Experiences, and Products division. Based on the company's recent earnings call, both seemed to be in good shape and primed for future success.

Key Takeaways

  • Disney investors should watch out for two things—streaming revenues and the prevalence of the delta variant—while evaluating the company's earnings potential in the coming quarter.
  • The company's release strategy for streaming and theater will once again be in the spotlight this quarter.
  • COVID-19's delta variant could affect revenues at its Parks and Recreation division and streaming subscriber growth.

Still, if there's anything that 2020 taught investors, it is that operating conditions for a business are not a given. To that extent, the Disney juggernaut might still encounter significant roadblocks on its path to success.

To Release or Not to Release

While investors have consistently rewarded Disney for a growth in Disney Plus subscriber numbers, the Black Widow fracas showed that the streaming platform itself has introduced several wrinkles in the company's movie business. That business draws revenues from multiple sources. In making a choice between streaming and theatrical releases, the studio will have to carefully balance out stakeholders and profits from all sources.

The company is testing out various strategies. It released Black Widow simultaneously across streaming and theatres. But Free Guy and Shang Chi: The Legend of Ten Rings, the company's latest releases, will be available to stream on platforms after 45 days in theaters.

Previous research and surveys have provided mixed evidence about the effect of streaming releases on theatrical revenues. For example, a study earlier this year found that reducing the window between streaming and theatrical releases had a "statistically and economically insignificantly impact" on revenues for theater owners in Korea. The caveat to the study is that audiences have different preferences across the world.

For Disney, an insignificant revenue decline is a winner all the way. Disney Plus has already racked up 116 million subscribers. Recent movie releases could lure more viewers to the service and further bump up subscription revenues. If the tide turns the other way, and audiences eschew theaters in favor of streaming, then the company might have to contend with many headaches, from angry stars to a backlash from theater owners.

All of that drama will occur against the backdrop of a streaming operation that, even as it reports heady subscriber growth, is yet to report profits. In fact, the average monthly revenue per subscriber for the service fell 10% on a year-over-year basis to $4.16 due to a higher mix of new subscribers from Hotstar—a streaming service in India where streaming fees are lower.

No wonder, then, that the company has yet to commit to a release strategy. "We will continue to utilize all available options going forward, learn from insights gained with each release and innovate accordingly while always doing what we believe is in the best interest of the film and the best interest of our constituents," Disney CEO Bob Chapek told analysts during the company's latest earnings call.

The Delta Variant's Effect on Revenues

The pandemic shutdown hammered Disney's revenues and profits. The delta variant, the most recent strain of COVID-19, could reverse the company's recent profit trajectory,

The Parks, Experience, and Products division could be the hardest hit. Disney has pulled out all stops to upgrade its parks to create new product experiences in the division. Its focus is not surprising considering that they represent the highest-return on investment for Disney.

Back in 2018, analyst Michael Nathanson estimated that Disney would spend $24 billion on parks in the next five years. Investors will soon want returns on that spending. Another shutdown might make investors impatient, and they might pull out their money from the company.

The delta variant could affect Disney's operations in other ways as well. The Indian Premiere League, a cricketing extravaganza similar to the Super Bowl that is broadcast on Hotstar, was originally scheduled for May but has been postponed to September due to COVID concerns. Another delay will likely hurt Disney's revenues and growth in a region that accounted for 40% of all new subscribers to the platform during the second quarter.