Where Will Disney Stock Be in 1 Year?
Disney's (NYSE: DIS) earnings reports are sometimes more dramatic than its blockbuster films, and the fiscal second-quarter (ended March 30) results, reported last week, were another mixed bag. That heightens the dilemma: buy, sell, or hold Disney stock? As always when considering the big question, it's most important to focus on the long-term story and skip the short-term antics. Let's see where Disney could be in a year from now and how that should influence investors.
Streaming is moving toward profitability
The big win for Disney in the second-quarter report was the dramatic improvement in streaming losses. The big shakeup that left former CEO Bob Chapek out and brought back Bob Iger was heavily influenced by high streaming losses, and part of the company's new strategy is a stronger focus on generating profits from Disney+ and Disney's other streaming networks.
Without the unprofitable ESPN+ service, streaming produced $47 million in operating income, reaching the goal of profitability. Total streaming loss was $18 million, and Iger reiterated that combined streaming would be profitable in the fiscal fourth quarter. Disney+ added 6 million subscribers in the quarter, although Disney+Hotstar subscribers decreased 6%.
In a year from now, streaming should be fully profitable, and if management is running it efficiently, it should stay that way. However, just as subscription growth isn't linear, streaming profits might have their ups and downs.
Linear networks are still dragging down entertainment as cord-cutting continues and advertisers follow viewers to streaming. Linear networks sales dropped 8% from last year while operating income was down 22%. This trend is likely to continue, but it may plateau in an improved economy when companies raise their advertising budgets.
Overall, Disney reported a 1% increase in revenue year over year, but earnings per share (EPS) fell to a $0.01 loss per share. It took a hit from a goodwill impairment related to its partial sale of Star India for less than it paid for it, which hurt Disney's profitability. Hotstar lost the rights to certain cricket matches, sending many customers packing and prompting Disney's partial exit. Adjusted EPS, which is exclusive of the impairment, increased 30% year over year to $1.21, exceeding expectations.
A year from now, this specific incident will be water under the bridge. Disney is a large company with varied businesses. In some ways that works in its favor, since most of the time, at least some of its businesses are performing well. However, underperforming parts can pull it down.
Parks are still important, but they're slowing down
The experiences (meaning parks) segment was solid in the second quarter, with a 10% increase year over year. Its operating income increased 12%. This segment is still enjoying elevated demand from its post-closure phase, but demand may be slowing down now. Management said it expects the third quarter to be "roughly comparable" to last year.
Disney said it would invest $60 billion in parks over the next 10 years. Parks are a key element of the overall entertainment model, offering an unparalleled experience for fans of its franchises. The model works through a cycle of entertainment in content and experiences, and providing these experiences for loyal fans creates relationships that fuel further growth. A year from now, growth might be steadier as it phases out the high growth and the slower aftermath.
Disney has no match in entertainment
Disney owns several film studios, including Pixar and Marvel, and it typically accounts for many of the top-grossing films at the box office in any given year. In 2023, it published four out of the top 10 box office performers. However, it hasn't had any recent hits. Its first-year results were also up against the Avatar sequel that was released in December of 2022 and was still racking up receipts at theaters in early 2023.
But there's a large slate of potential megahits coming up for release later on in 2024, including Moana 2 and Mufasa: The Lion King. Disney also has several highly anticipated films coming out in 2025, such as Avatar 3, and it has three new Marvel films coming out within the next 12 months.
Disney is a powerhouse entertainment company when all its parts are working well. There's a distinct possibility that this could be the case a year from now: Parks should be at full speed, with new rides and experiences; streaming should be profitable and growing; the new ESPN will have been launched. And Disney will have released several movies likely to be hits. There may be bumps ahead. One thing seems very likely, though: It will get there at some point.
Regardless of what happens this year, Disney has incredible assets in its studios, franchises, and unparalleled global theme parks, and it should reward long-term investors.
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Jennifer Saibil has positions in Walt Disney. The Motley Fool has positions in and recommends Walt Disney. The Motley Fool has a disclosure policy.
Where Will Disney Stock Be in 1 Year? was originally published by The Motley Fool
