Disney's Financial Stagnancy Lasted for a Decade. Three Possible Factors That Might Spark a Revival
It's quite challenging to locate a corporation exhibiting more notable competitive advantages, yet experiencing a less favorable run on the stock market in the past decade compared to Walt Disney (-1.15%).
This enduring icon in entertainment has been a staple in homes globally for nearly a century and has led the charge in family entertainment since Disney's debut of its first animated feature film, Snow White in 1937. Today, its influence extends to ESPN, TV and movie production, streaming platforms such as Disney+, Hulu (acquired from Fox), and Hotstar in India, theme parks, a cruise and vacation business, a substantial consumer products sector, and its legendary TV and film division, encompassing ABC and various streaming services.
However, despite these compelling advantages, poor stock performance can be traced back to the evolving landscape of the entertainment industry. The shift towards streaming platforms has disrupted the conventional media ecosystem reliant on box office earnings, cable subscriptions, and advertising revenues. Operating income saw a steady decline starting in 2019 and suffered a significant setback during the pandemic, with recovery still in progress.
Nevertheless, the company's latest financial report for Q4, ending on September 28, brought some promising news. The stock surge of up to 12% on this information suggests that the company may be poised for success in the long term. Let's examine three potential factors that could position Disney as a long-term success story:
1. The bleeding from linear media slows down
Disney, like its counterparts, has struggled to adapt to streaming platforms from the traditional linear media landscape. Lower cable revenue results from customers opting for cord-cutting, as well as a decline in ad revenue. However, the Q4 numbers showed a positive trend, with streaming income exceeding the losses in linear media. In the direct-to-consumer segment, which includes the non-sports streaming platforms, the company reported a profit of $253 million, a marked improvement compared to the $420 million loss a year ago. Conversely, linear networks saw a decline in operating income, though the decrease wasn't as severe as anticipated.
This shift towards streaming profits is noteworthy and suggests that Disney may finally be ready to adopt a direct-to-consumer (DTC) first strategy. The company successfully erased the deep losses in the direct-to-consumer segment, setting itself up for better financial performance in the coming year.
Ad revenue also improved, as Disney managed to expand their ad impressions, following in the footsteps of Netflix, which has garnered 70 million subscribers for their ad-supported tier within two years of its launch.
2. The theme park business flourishes
Although the core entertainment division struggles, Disney is investing in its theme park business, which is expected to experience growth in the near future.
In the fourth quarter, the domestic segment demonstrated strength, but the international segment faced challenges, resulting in an operating income reduction of 6% to $1.66 billion in the quarter, despite an overall 4% annual increase to $9.3 billion.
Despite some volatility, management anticipates future growth in the theme park business, projecting 6%-8% growth in operating income for the segment in the coming year, with development of seven more ships in progress.
These additions should contribute to steady expansion of the theme park business, supported by new ships, attractions, and enhancements at the parks.
3. ESPN streaming offers potential growth
Disney is planning to introduce its flagship ESPN network to streaming platforms later this year, which should help bridge the divide between linear and streaming entertainment.
ESPN has historically been a valuable asset for Disney, and the network has expanded its sports rights in preparation for the upcoming launch. Bob Iger, CEO, also hinted at possible innovations in the streaming app, such as AI-driven personalized SportsCenter with a customized sports experience, a feature that could set new standards in sports entertainment.
Iger also pointed out that live television, and specifically live sports, enjoys strong investor appeal and the company's relationships in this area should support the ESPN streaming app's success. In summary, Disney may finally be on the cusp of exiting its lengthy transition to streaming with profits in DTC, a growing subscriber base, strong ad acceptance, a thriving parks and experiences business, and heightened anticipation for the ESPN streaming launch. Management is projecting high, single-digit EPS growth for the coming year, pleasing investors, and profit margins are expected to continue expanding as the streaming business expands. It appears that Disney may soon leave its challenged decade behind.
After acknowledging the challenges faced by Disney due to the evolving entertainment industry and shift towards streaming platforms, investors may consider investing in the company due to its promising financial report and potential for long-term success. The company's Q4 financials showed a positive trend in streaming income, exceeding losses in linear media, and a significant improvement in the direct-to-consumer segment. Furthermore, Disney's decision to adopt a direct-to-consumer (DTC) first strategy, as well as its focus on theme parks and the upcoming launch of ESPN on streaming platforms, are all indicators of potential growth in the future. By investing in Disney, individuals are not only supporting a global entertainment icon but also putting their money in a company poised for a strong comeback.
