Investing Club: All Disney's businesses will benefit if ad-supported Disney+ draws more subscribers

Published Fri, Mar 4 202211:19 AM ESTUpdated Fri, Mar 4 202211:50 AM EST

An upcoming ad-supported Disney+ subscription option will get more people under the Magic Kingdom umbrella to spend money on all Disney (DIS) businesses. The Club holding announced Friday morning it'll offer an ad-supported Disney+ subscription in the U.S. later this year, with plans to expand the offering to international markets in 2023. This is the first time Disney+ will see an ad-supported model, but Disney is certainly no stranger to the structure: Hulu and ESPN+ are both ad-supported. In the release , management said it views the move as a "building block" to help Disney achieve its 230 million to 260 million subscriber goal by fiscal 2024. There are a two ways to look at this move. On the bear side, one could argue it's being made due to slowing subscriber growth. On the bull side, however, it should draws more people into the Disney ecosystem and any decline in average subscription rates will be offset by the ad revenues. We are not dismissive of the slowing growth angle, and Friday's nearly 4% drop in the stock points to a more negative take. However, in a down market on Russia seizing Europe's biggest nuclear power plant in Ukraine, it's hard to tell how much of the price action in Disney shares, if any, can be attributed to Friday's streaming news. We believe the direct effect of growing the subscriber base, even if ad-supported, will help increase returns on the incredible content spend we're seeing to build out the service. The indirect effect also must not be overlooked — it's where we think the greater opportunity lies. As we noted in our company profile , Disney has an incredible content flywheel. Put another way, each offering from Disney ultimately feeds into its other offerings — you watch the movie in theaters, which attracts you to the show on Disney+, which drives you to visit the parks, take a Disney cruise and buy character costumes for Halloween. This effect means that the ability to bring in a new viewer goes far beyond the simple addition to subscription revenues over time and why we think that ultimately, the increased engagement leads to greater monetization opportunities over time — even if that engagement must be supported with ads. The bottom line here, whenever a company has a flywheel dynamic at play, it's important to consider the ripple effects of moves made for any one operating segment or offering. In the case of Disney, we think the benefits will ultimately reach far beyond just growing the Disney+ subscriber base. Let's not forget that Disney put up a great quarter last month, beating estimates on consolidated sales and earnings with both segments reporting better than expected revenue and operating income. Subscriber numbers for Disney+ and ESPN+ came in above expectations while Hulu subscribers matched the consensus. In Tuesday's sell-off, we bought 50 more shares of Disney . (Jim Cramer's Charitable Trust is long DIS. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Close-up detail of the Disney+ app icon on an Apple iPhone 12 Pro smartphone screen.

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