Disney Shareholders Receive Promising Updates, Yet Ponder Over Stock Purchase Opportunity
Weary Disney (DIS -1.36%) investors received some delightful news last week as the company shared optimistic insights about its operations. However, the stock has only managed to increase by 27% over the past decade, a dismal performance for a Dow 30 company, which might make you reconsider if it's worth investing in.
Let's delve into the matter and determine if it's wise to entrust your money into a stock that's underperformed for an extended period.
Failure to Seize the Moment
The consumption habits of media and content have undergone significant shifts over the past five or so years. By 2019, Disney was on the cusp of a streaming dominance with its strategic acquisition of a portion of Hulu and the launch of its own streaming service, Disney+. However, the company failed to anticipate the vast transformation of the entire media landscape that was sparked by the pandemic.
Admittedly, other legacy media firms have also been experiencing difficulties. Even Netflix, though not vintage, has been grappling with its own challenges.
Although Disney has excelled at establishing its streaming channels and stockpiling content, as well as upgrading its parks, the primary obstacle to its progress has been the lack of profitability in its streaming ventures. Management has promised for several years now that it will achieve profitability by the end of 2024, and they have followed through on that promise with their recent financial results.
The fourth-quarter earnings results for 2024 were nothing short of impressive. Revenue grew by 6% year-over-year, and Disney+ Core paid subscriptions increased to 120 million, an addition of 4.4 million subscribers. Disney boasted two blockbuster summer hits with Pixar Studio's Inside Out 2 and Marvel Studio's Deadpool & Wolverine, and the parks segment also saw a marginal increase of 1%.
The standout achievement, however, was the positive profit margin of $253 million in the entertainment streaming sector. This figure excludes sports streaming, and the total streaming profit margin reached $321 million. This was due to an increase in paid subscriptions and a 14% surge in advertisements for the ad-supported tier. Consequently, the operating income for the entertainment segment surged to $1.1 billion, up from $236 million the previous year, despite the continued decline of linear networks.
In conclusion, operating income increased by 23% year-over-year, and earnings per share (EPS) rose from $0.14 in the previous year to $0.25 this year.
The Focus on Profits
It's curious how battered Disney stock has become, given the company's dominance in the entertainment sector. The name Disney is synonymous with entertainment and remains the leading media, film, and park giant.
A glance at the following chart reveals that sales have fully rebounded from pandemic lows and now surpass levels from a decade ago, while net income remains below what it was a decade ago. The stock price has fallen flat after experiencing a surge in 2020-2021.
It's important to note that net income has been adversely affected by the streaming efforts, which is why the market has assigned such a high value to Disney getting its streaming strategy in order. In the chart, the change is negative, but Disney has been reporting positive net income for several quarters now. It will take time to surpass previous highs, even if business trends continue to be favorable.
Taking a gamble on the Leader
In a general sense, it's wise to have some investment capital in reliable industry leaders. However, Disney hasn't been all that dependable lately, has it? As circumstances evolve, even the largest companies can wind up as relics and potential failures.
Currently, Disney doesn't seem to fit this mold. The company is pushing the boundaries of media trends and churns out an abundance of fresh content. However, the stock has failed to perform well in recent times.
There are still challenges ahead. Bob Iger was brought back as a savior, but the company is once again searching for someone who can steer the company towards its future triumphs successfully. Profits are still lagging behind what the market is expecting.
At its current price, Disney trades at only 19 times forward-one-year earnings. This could represent a bargain, but the low ratio also reflects the market's hesitation.
There's reason to be optimistic and reason to exercise caution. Investors might consider taking a small position with the hope of Disney's resurgence.
Considering Disney's recent financial performance, you might want to reevaluate your strategy if you're thinking about investing in the company's stock. Despite the company's success in boosting its streaming service subscribers and revenue, the lack of profitability in its streaming ventures has been a primary obstacle to its progress.
In light of Disney's fluctuating performance, it's crucial to carefully weigh the risks and rewards before making a financial decision. Investing in the stock market involves managing your money wisely, and it's essential to consider various factors such as the company's financial health, market trends, and your personal risk tolerance.
