Juenger: Disney+ Sub Adds Have Peaked

Walt Disney Co. investors heartened by the 10 million users the entertainment conglomerate signed on to its streaming service Disney+ in its first hours won’t ever see that level of growth again, according to Sanford Bernstein media analyst Todd Juenger.

In a research note Friday, Juenger wrote that he believes Disney+ subscriber additions have peaked, comparing them to similar stages in the evolution of other streaming video giants Netflix and music service Spotify.

Disney+, fueled in part by free offerings of the service to customers of distributors like Verizon Communications, signed up 10 million users in its first hours of existence on Nov. 12, and ended December with about 26.5 million users. Since then the growth of the service has slacked off a bit -- Disney said most recently that Disney+ had about 28.6 million users as of the beginning of February -- but is still on a path to reach 40 million users in its first year.

“Among the many aspects that make the launch so fascinating and unusual, is the fact that Disney+ has probably already achieved its peak absolute net adds, in the first quarter of its existence,” Juenger wrote. “In other words, there will probably never be another year where Disney+ (or, in fact, the entire suite of Disney OTT services) adds as many subs as it did in the first year (or, frankly, in its first quarter).”

That is different from Netflix and Spotify, which according to Jeunger took about 9 years for growth to level off. And it is for that reason that the analyst believes that applying a Netflix-like multiple to Disney stock is a mistake.

Investors have puzzled over why Disney stock has underperformed the S&P 500 Index since the Disney+ launch (it is down 5% while the S&P has risen 9% in that time frame). But Juenger pointed to the rise in Disney stock prior to its November launch -- particular after its April investor meeting where Disney unveiled its price-point for the streaming service. Disney added about $50 billion in market capitalization on two days -- the day after its April Investor Day and the day after the Disney+ November launch. That works out to about 3 times Juenger’s 2020 revenue estimate for Disney.

But other investors have wondered why, given the accelerated growth of the Disney + service, why the stock doesn’t warrant Netflix-like multiples.

In his note, Juenger estimated that by 2028 Disney+ will reach the same level of subscribers as Netflix and Spotify did in their ninth year -- about 140 million. But he added that while Netflix especially warranted high revenue multiples because of the runway in front of it being the basic inventor of SVOD, such is not the case for Disney+. He estimated that Year 9 subscribers as a multiple of Year 2 subscribers would work out to be 6.5 times for Netflix, 25 times for Spotify and 2.5 times for Disney+.

“The market has applied (much) higher revenue multiples to Netflix and Spotify, early in their development, because the market (rightly) expected so much more growth ahead of them,” Juenger wrote. “Even today, the market expects Netflix and Spotify net sub adds to stay roughly flat, in absolute, before eventually fading into a gradual decline. That's not true, in our strong view, for Disney+.”

That doesn’t mean that Disney+’s rapid subscriber growth is a bad thing. Instead, it is more of an example of the growing maturity of the streaming market and the strength of the Disney brand. Unlike Netflix and Spotify in their early days, consumers did not need to be educated on what Disney is, or what streaming video means.

“Hence, if you like SVOD and you like Disney – why wouldn't you be expected to sign up, immediately?” Juenger wrote. “On the flip side, however, it also begs the other question – why would it not be true that pretty much any consumer who is a strong candidate for this product, would sign up right away? Said in the extreme, maybe everybody who should ever be expected to sign up for Disney+, will do so almost immediately. Of course we don't believe the case is that extreme.”