Disney Streaming Business Turns Profitable, Stock Drops 10% on Weaker Q3 Outlook

Disney’s streaming business has hit a major milestone, turning a profit for the first time in its history. However, the company expects weaker results in that segment for the current quarter, causing its stock to drop nearly 10% on Tuesday.

The forecast underscores Disney’s ongoing challenges in achieving sustained profitability in streaming, a crucial focus as its traditional TV business declines. CEO Bob Iger’s recent turnaround plan has garnered investor optimism in recent months, with the company also emerging victorious in a high-profile proxy fight against activist investor Nelson Peltz.

In the fiscal second quarter, Disney’s direct-to-consumer (DTC) entertainment segment, which includes Disney+ and Hulu, reported operating income of $47 million, a significant improvement from the $587 million loss in the same period last year. However, the company anticipates DTC results in the entertainment segment to be in the red in the third quarter, driven by losses from its Indian brand Disney+ Hotstar.

While not all of Disney’s streaming services were profitable in Q2, total direct-to-consumer losses decreased to $18 million from $659 million in the previous year. Disney aims to achieve full streaming profitability by the fourth quarter of this year.

Despite the streaming challenges, Disney reported adjusted earnings of $1.21 per share in Q2, surpassing analyst expectations. Revenue also met consensus estimates, coming in at $22.1 billion.

The company raised its guidance for full-year adjusted earnings growth to 25%, up from the previous 20%. However, Disney did incur an impairment charge of over $2 billion after merging its Star India business with Reliance Industries.

Analysts remain cautiously optimistic about Disney’s future, noting that the soft guidance for entertainment streaming in the next quarter may temper enthusiasm. Nevertheless, the overall sentiment is that Disney is in the midst of a long-awaited turnaround.

In the second quarter, Disney saw an increase in Disney+ subscriber additions, with over 6 million core subscribers added. The parks business also delivered strong results, with domestic operating income rising to $1.61 billion.

However, domestic operating income at ESPN declined, attributed to lower affiliate revenue and subscriber losses. The company is doubling down on sports streaming, with plans for a joint venture partnership and a standalone ESPN streaming platform set to debut in 2025.

Overall, Disney’s streaming business is showing signs of progress, but challenges remain as the company navigates the evolving media landscape. Investors will be closely watching Disney’s efforts to achieve sustained profitability in this key segment.