Multiple breakthroughs, is Disney's spring finally here?

Hello everyone, I'm Dolphin Research!

$Disney(DIS.US) released its Q2 FY2025 (CY25Q1) earnings before the U.S. market opened on May 8 ET. The quarterly results were solid, exceeding market expectations with multiple business segments outperforming, especially in profitability. Management subsequently raised this year's outlook.

Key highlights:

1. Dual strategy of DTC streaming bundles + account sharing works: The net addition of streaming subscribers this quarter was highly encouraging. Last quarter, the company guided for a slight decline, and third-party data showed weak user activity trends for Disney+ and ESPN. Combined with Netflix's another round of better-than-expected subscriber growth, the market had low expectations for Disney's DTC business.

While price hikes can drive growth, relying solely on ARPU increases feels like "drinking poison to quench thirst"—it never brings real comfort. However, Q2 actually saw Disney+ add 1.4 million net new subs, with guidance for "slight growth" next quarter. Full-year streaming profits are expected to surge YoY due to subscriber growth, price increases, ad-tier adoption, and reduced content waste from bundling. Growth driven by "user recognition" undoubtedly boosts market sentiment.

Dolphin Research believes this likely stems from Disney+ content bundling, crackdowns on password sharing, and the hit movie "Moana 2" debuting on streaming.

2. Domestic parks outperform: Parks were the second positive surprise. Given macro pressures and the post-pandemic boom cycle, both domestic and international parks were expected to face growth headwinds. With Epic Universe opening on May 22, concerns about intensified domestic competition grew.

Indeed, international markets (especially China) showed consumer weakness with declining per-capita spending. But domestic attendance rebounded 2% YoY this quarter, while per-guest spending rose 5%, showing no pressure.

Beyond holiday seasonality, the December launch of "Treasure" cruise ships also boosted local park spending. Though full-year profit targets weren't raised, management noted stable booking growth so far, easing some competition fears.

But actual impact remains to be seen—Epic just opened, so we'll monitor initial visitor feedback.

3. Flagship ESPN platform coming, more catalysts ahead: Sports also beat expectations, with FY profit growth guidance raised from 13% to 18%. The August launch of ESPN's flagship (merging linear TV + streaming under one subscription model) faces low expectations, so the guidance hike may lift sentiment.

Dolphin Research's View

Since restructuring and DTC's breakeven, Disney's recovery hasn't been smooth. Last quarter's minor disappointment suggested limited upside, but also very limited downside.

Pre-earnings, the market stayed cautious due to: 1) Disney+ lagging Netflix; 2) Post-pandemic international park fatigue + new Epic competitor; 3) Sports content competition clouding ESPN flagship expectations.

Add Trump's recent "movie tariff" threats and China's film import restrictions (details unclear), which could raise costs and spark virtual-content trade fears.

Thus, this quarter's beat was a timely relief after low expectations. Dolphin Research has awaited Disney's post-Iger restructuring upturn, delayed by industry turbulence and legacy transition pains.

For example, last year began a film cycle—despite delays/flops, output ensures a $1B+ hit every 6 months ("Inside Out 2", "Deadpool & Wolverine", "Moana 2"). Recent "Thunderbolts" grossed $170M globally in one week, with more potential blockbusters lined up.

With domestic parks stabilizing early and ESPN flagship launching in August, Disney isn't short of near-term catalysts. Long-term, $30B domestic park expansions and a seventh park in the Middle East promise more growth for the high-margin experiences segment.

Valuation-wise, even after a 10%+ post-earnings jump to $188B, Disney trades at just 11x 2025 EV/EBITDA. Assuming 10% 2026 growth, ~10x remains below historical averages. Sum-of-parts (12x parks, 15x films, 8x sports) suggests $230B at optimistic sentiment.

I. Understanding Disney

As a century-old empire, Disney's structure has evolved. Dolphin Research detailed this in "Disney: The Centenarian Princess’s ‘Anti-Aging Secrets’".

Recent leadership and structural changes spotlight three segments—Entertainment, Sports, Experiences:

Old vs. new structure?

The new framework elevates ESPN as a standalone sports unit, reflecting strategic priority.

(1) Entertainment: Legacy linear, DTC (ex-ESPN+), content sales, with trimmed redundancies/low-margin channels.

(2) Sports: ESPN networks, ESPN+, Star.

(3) Experiences: Parks, cruises, consumer products—similar to before but with adjusted financials.

2. Investment thesis

(1) The restructuring merges content and distribution by vertical, solving prior conflicts (e.g., theatrical vs. Disney+ releases hurting box office and talent relations).

(2) Experiences are mature, with Disney's IP dominance making parks a stable cash cow tied to consumption.

(3) Entertainment revolves around film production/distribution (studios, legacy/DTC channels). Performance hinges on slate quality and broader film demand.

Streaming remains a long-term focus, but pandemic-era hypercompetition exposed Disney's lack of series libraries despite heavy spending. Rather than pure growth, streaming now partly offsets linear declines.

(4) The new darling—Sports—may be the true growth path. While ESPN isn't new, sports streaming is heating up (e.g., Netflix's push). Disney's upcoming ESPN flagship (with Warner Bros. and Fox content) doubles down on this bet.