The Walt Disney Company (SAY 5.03%) released what can best be described as a mixed fourth-quarter earnings report on Tuesday that tells both a story of growth and struggles. The stock initially surged after the report, but has since slumped. Disney stock is now down 48% from a year ago. Is it the right time to buy?
Do some magic again
Disney continues to make strides to propel itself forward after the pandemic rocked its business. Revenue rose 9% in the fourth quarter (ended Oct. 1) to $20.5 billion, but that was slightly below Wall Street expectations. Adjusted earnings per share of $0.30 were down from $0.37 a year ago and were well below Wall Street expectations of $0.56. That was enough to bring the stock down. But there were other very acute signs of growth.
Parks’ performance was phenomenal in the fourth quarter. Sales increased by 36% and operating profit increased by more than 100%. CEO Bob Chapek said demand is outstripping park capacity, which is a strong signal of the segment’s continued strength. This despite the closure of the Shanghai park for part of the quarter.
Disney continues to invest in new rides and experiences, resulting in high demand. It has seen an “increase in bookings” for its new Wish cruise line, for example.
Winning the streaming war
The streaming segment saw phenomenal growth in the fourth quarter. There were 14.6 million new subscriptions, including 12.1 million for the premium Disney+ network. This brings the total to more than 235 million, including 164 million for Disney+. It’s on track to reach the projected 230 million to 260 million Disney+ subscribers by 2024. Additionally, the total number of subscriptions has exceeded netflix (NFLX 5.51%)which had 223.1 million subscribers at the end of the third quarter.
Direct-to-consumer (DTC) segment revenue increased 8% year-over-year. However, DTC’s operating losses soared to nearly $1.5 billion in the fourth quarter from $630 million last year. Management said this was due to increased costs related to Disney+ and losses should start to narrow from here.
Disney is implementing cost-cutting initiatives to better manage its DTC content spend, and it maintained its guidance for Disney+ to become profitable in 2024. It’s launching an ad-supported tier in December, which is expected to be revenue robust and cost-effective driver. It has secured deals with 100 advertisers for the launch and an extensive network of 8,000 advertisers with whom it maintains relationships through its other content channels.
The company expects the level of advertising, combined with price elasticity and better cost management, to push the program out of the red.
Unparalleled content on the way
What excites me the most about Disney is the content that will be released over the next few months. Disney already has several movies slated for release over the next few years. And Disney’s content library powers streaming with movies that end up on streaming channels after the movies are released, as well as direct-to-stream content based on Disney movies and characters.
Marvel Studios in particular has been an incredible asset to the Disney library, and many of Disney’s most popular new movies come from the Marvel Cinematic Universe. Marvel will also release Avatar: The Way of the Water December 16. This highly anticipated film is the sequel to the highest-grossing film of all time.
Disney already has an unrivaled library of content, and its movies are driving all sorts of other revenue generators like merchandise, more content, and rides.
And yet the stock is falling
Disney shares are down after the latest report showed both revenue and profit losses as well as huge DTC losses. After three years, investors seem to see Disney+ as a drag on profits despite the assurances that it will become profitable within two years. At least this quarter, streaming has seriously eaten away at Disney’s revenue, and for next year it’s likely to continue to take it away.
Disney has a lot to offer and should be a great stock to hold for the long term. But there doesn’t seem to be a rush to buy in this climate. You can’t time the market, but if profitability improves going forward, the stock price should start to rise. If the outlook for Disney looks attractive to you and you have a long-term horizon, you might consider adding Disney stock to your wallet even now.
Jennifer Sabil has positions at Walt Disney. The Motley Fool holds positions and recommends Netflix and Walt Disney. The Motley Fool recommends the following options: January 2024 long calls at $145 on Walt Disney and January 2024 short calls at $155 on Walt Disney. The Motley Fool has a disclosure policy.