Disney+ stands to gain from new ad tier, but Iger's streaming strategy still a question mark

Published Fri, Dec 9 20222:32 PM ESTUpdated Fri, Dec 9 20223:30 PM EST

Walt Disney 's (DIS) newly launched ad-based subscription tier for Disney+ subscribers should bolster the streaming platform's competitive edge, particularly given the positive response from investors and users to Netflix 's (NFLX) ad-supported plan released last month. Disney started offering the new service on Thursday , with more than 100 advertisers on board to help the nascent streaming platform reach profitability by 2024. However, the new offering had been engineered by former CEO Bob Chapek, who was pushed out of the company last month amid heavy losses for the streaming division. Now, with CEO Bob Iger back at the helm , the Club is looking to see how the Disney veteran will put his stamp on streaming, and which offerings he'll prioritize. Disney+ subscribers now have the option for the Disney+ basic platform with ads, for $7.99 a month, or the premium option of $10.99 per month without ads. The streaming service also offers plans that include Hulu and ESPN+. In a cautionary tale, cable news network CNN in April shutdown its streaming service, CNN+, after just a month. The move came amid a corporate and management reshuffle . Building and growing an industry-leading streaming service has required Disney to incur high costs along the way. The entertainment giant has been spending to produce new content to please existing viewers and attract new subscribers, a key metric analysts review when evaluating streaming growth potential. That tactic has been working, as Disney+ subscribers have climbed to 235 million as of the last quarter , exceeding that of rival Netflix's 223 million subscribers during the same period. However, content production costs are about 70% to 80% of Disney's aggregate direct-to-consumer revenues, according to a recent note from MoffettNathanson, which has been eating into profitability. Last quarter, Disney's streaming division incurred a $1.47 billion loss. Management said it still expects content spend to be around $30 billion in fiscal 2023, in line with what the company spent this past year, but expects losses to abate by the fiscal first quarter of 2023. At the same time, Netflix's success with it's new ad-tier platform could signal a more profitable path ahead for Disney. Wells Fargo on Friday upgraded Netflix to overweight, or buy, from equal weight on the back of "improving" content. Analysts at the bank said they were "bullish" on the streaming giant's new advertising tier to help churn, or the rate at which customers give up the streaming service. Shares of Disney, down nearly 40% year-to-date, were trading up around 1.6% in Friday afternoon trading, at $94.06 apiece. Bottom line The Disney+ launch with advertisements this week could be a great way to attract new, cost-conscious subscribers and, therefore, stay competitive in the streaming wars. Moreover, higher subscription pricing combined with advertising can be drivers that help boost profitability, allowing Disney+ to reach its goal of making money on streaming by fiscal 2024. The entertainment company has dented its balance sheet to invest in content production, but we hope to see those expenses come down next year, easing the company's debt burden and offering some relief to the stock price. Importantly, we are eager to hear Iger's position on the future of Disney's streaming service, given the recent change in leadership. We are comforted by the fact that Iger has been with the company for decades, making him a steady hand and a great operator — but we want more color from him on streaming. Disney stock has given up the gains made since Iger returned in late November. But we continue to believe Disney is an iconic brand and view the drop as a potential buying opportunity into weakness. (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.

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