'Mulan' release is Disney 'pulling the plug' on box office content right now: Analyst

Disney reported a surprise profit in its third quarter earnings report, and announced it would be releasing 'Mulan' on Disney+ September 4th for $29.99. Rosenblatt Securities Analyst Bernie McTernan joins the On the Move panel to discuss.

Video Transcript

ADAM SHAPIRO: Turning our attention back to Wall Street, we can see Disney right now doing much better after its earnings yesterday. And as you can see, we want to bring in Bernie McTernan, Rosenblatt Securities Analyst, who is joining us from Fairfield, Connecticut, to talk about how Disney is doing, especially with the announcement of, I think they're saying, what, 100 million streaming customers, not just Disney Plus, but Hulu and ESPN, with the potential to reach many more, what, 200 million by 2022?

BERNIE MCTERNAN: Yeah, that's what we're thinking. So really, the key takeaway from last night is that they announced an Investor Day for streaming is coming in the coming months, and that they're going to launch a Star-branded international streaming service. So three things here.

One, at the Investor Day, we expect them to update their Disney Plus subscriber guide and profitability expectations. They're already at the low end of that subscriber guide that they expect to hit in 2024. And on profitability, they expect to be break even by '24. We think that's going to happen by '22.

Second, on the Star-branded OTT service, this is significant because we think this, along with the continued expansion of Disney Plus globally, is going to drive that next 100 million subscribers. You guys have in the-- in the graphic before how they currently have 100 million subscribers. We think that could be 200 million subscribers potentially in '20-- fiscal '22, depending on when they launch the Star-branded service. Why that's significant is that because we expect Netflix to end the year at 200 million subscribers. As of last night's close, Disney was at a five-- consolidated Disney traded at 5% discount to Netflix's market cap.

And third, and this is really significant for what's driving this huge stock price reactions today for Disney, is that this is a stock that lacked a lot of positive catalyst, and the bears and the shorts could point to parks, and the coronavirus, and the losses and investments the company was making. Well, this is them really continuing to put all their chips in the middle of the table. And we think this Investor Day that's coming in the coming months is going to be another positive catalyst for the company, similar to what happened last April, which drove the stock from $100 on its way to $150. So we still think this is a compelling time to own shares.

JULIE HYMAN: Bernie, all of this is-- is well and good, but I just want to ask you about two things. One, streaming stuff doesn't make any money, isn't going to make any money for a little while. And parks are still dismal, right?

And not only are they dismal-- yes, you could argue we're going to see an improving trajectory, but Bob Chapek also said the cancellations at the parks were higher even than they expected it, and they didn't have high expectations, right? So-- so the parks business is a big albatross at this point and looks to be for the foreseeable future. Why isn't that a bigger issue for investors today?

BERNIE MCTERNAN: I think it's striking-- you're certainly right in terms of the forward-looking commentary on demand trends weren't great. We don't expect a big sequential improvement in adjusted or segment OI losses to combat the parks next quarter. We don't think you're going to get back to the pre-- to prior levels of segment OI until 2022. And to know how conservative that expectation is really depends on when you think a vaccine is going to be coming out.

So I think, though, that really people are embracing streaming, and that's because this is a positive leg of the story. We think they're going to be making money in streaming soon, in '22 for Disney Plus. They expect Hulu and ESPN Plus profitability to improve in the fourth quarter as well. So streaming is a scaled game. And you know, that's why they are still early in the total scale opportunity.

INES FERRE: Bernie, Ines here. And what do you make of the company announcing that it's going to put "Mulan" on Disney Plus? I mean, it had been delayed, and putting it for about $30 rental, it-- they can't really-- they're not really-- this is a testing of the price point, correct? And could you see other movies-- Disney doing the same with other movies?

BERNIE MCTERNAN: Yeah, I think this is a great experiment for Disney. They clearly-- you can see with them and Warner Brothers [INAUDIBLE], no one wanted to be the first one to hit the box office, and they kept on pushing back their release dates. So this was Disney really pulling the plug, saying they don't want to be the guinea pig. And now instead of let's testing what the-- what the ROI will be on box office content in a coronavirus, let's test what the ROI is on premium DOD.

So I think this is a really interesting experiment for them. I still think once the box office gets back to form eventually, the theatrical window will still be more profitable for them than any of the [INAUDIBLE], just because of their focus on blockbusters. That could be different for other studios. But remember, Disney, you know, it's big tentpole films that, you know, drive massive audiences, so it's still unclear if [INAUDIBLE] can drive those same audiences. But it's a great experiment for the company, and certainly, the-- you know, gives them optionality going forward.

AKIKO FUJITA: Bernie, I want to get back to the point that Julie made, which is the mix that we've known Disney for simply isn't there right now, largely because of the pandemic. The 85% drop in revenue from the park. You talk about the content side, the movies that are usually the big drivers.

I mean, the positive story is the streaming, and I take that point. But is that really what the play is for Disney right now? For investors, is it time to maybe re-rate the stock, given that we're not likely to see the bounce back from what has traditionally been their main revenue driver for a while?

BERNIE MCTERNAN: Yeah. And this is something that the company has been working through. And I think that with the parks, you have to take the long view. And if you're someone who thinks that parks is-- no one's ever going to go to the theme parks again, then honestly, this probably isn't the stock for you.

But we think the parks will get back to prior levels of profitability at some point, we have in 2022. And then while all this is going on, they're building this massive asset with Disney Co., the three core streaming services going to four core streaming services, and they're going to be a global juggernaut. And I think that's really-- should be the focus here, and that's clearly what investors are reacting to today.

ADAM SHAPIRO: All right, Bernie McTernan is Rosenblatt Securities and an analyst there. We appreciate your being here.