The magic is back for Walt Disney (DIS 1.86%) stock -- which is the best-performing component in the Dow Jones Industrial Average so far this year even after selling off in April. Here's what you need to know about Disney, where it could be headed, and whether the blue chip stock is a buy now.
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This year's big winner has been a big loser for years
Disney's outperformance in 2024 is more the result of years of underperformance rather than Disney being a consistently strong stock. The entertainment titan ended 2023 at just over $90 a share -- close to the company's eight-year low of $78.73. Even after falling around 8% so far in April, Disney is still up close to 25% year to date. However, the stock is lower today than it was five years ago, which illustrates the magnitude of the downturn.
A shadow of its former self
To understand where Disney could be headed, we first must know where it has been. The following chart tells a big part of the story.
DIS Revenue (Annual) data by YCharts
Disney was flying high leading up to 2020 with massive blockbuster hits and what was, in hindsight, the peak of the Star Wars and Marvel box office bonanza. Disney+ was launched in November 2019, which paved the way for Disney to enter the direct-to-consumer streaming business and help offset weakness in its cable business. A strong content lineup, new ways to consume content, and excellent performance from the parks made Disney a darling.
The COVID-19 pandemic crushed Disney's parks and movie business, but optimism for Disney+ helped the stock reach an all-time high in early 2021. The idea was that the parks and movie business would come roaring back post-pandemic, and Disney+ would be a huge cash-cow success. It sounded great in theory, but it's not what actually happened.
Instead, Disney entered a bit of a content slump. Its box office performance has paled in comparison to pre-pandemic. There's been some solid original content on Disney+, but the service has lost money and has been criticized for producing too much quantity and not focusing enough on cost management. On the bright side, the parks have been a major winner.
Prioritizing profitability
For several quarters now, Disney CEO Bob Iger and his team have made profitability the No. 1 focus for turning the business around. And one of the reasons why the stock has popped in 2024 is because the strategy is finally working.
In its first-quarter fiscal 2024 release, Disney said it is on track to meet or exceed $7.5 billion in annualized cost savings by the end of the fiscal year as well as reach profitability in the combined streaming businesses (Disney+, Hulu, ESPN+, etc.) by the fourth quarter of fiscal 2024.
Longer term, the hope is that streaming profits can help offset ongoing declines in Disney's linear networks (cable) business. Even now, linear networks present big shoes to fill. Last quarter, linear networks posted $1.236 billion in operating income off of $2.803 billion in sales -- good for a 44% operating margin.
Disney seems to be closer to finding the golden ratio of how much it needs to spend on streaming content to retain and grow its subscriber base. It's clear now that it was spending way too much in the beginning to focus on subscriber figures rather than making the service profitable.
A partial turnaround
From a profitability standpoint, Disney's turnaround has been a noticeable success. The stock was beaten down for too long and deserves its recent pop. However, Disney still has a lot more work to do to return to growth and stay in growth mode. Doubts of a sustained turnaround may be why the stock has pulled back in April.
The most glaring issue is that Disney simply isn't delivering from a content standpoint. Looking at its content slate for the upcoming years, many of the standout ideas are based on established franchises, like Moana 2 in 2024, a new Avatar movie in 2025, and Frozen 3 and another Toy Story movie in 2026 or later. There's nothing wrong with making sequels in successful franchises, but there is an issue when that's the primary source of worthy content. Besides Moana in 2016 and Frozen in 2013, Disney has had very few original, successful franchises outside of Star Wars and Marvel content.
Disney can do all the cost-cutting and budgeting it wants, but at the end of the day, it has to deliver at the box office and/or through streaming. In November, Disney announced it would acquire the remaining 33% stake in Hulu, which provides a differentiated content engine to pair with Disney+. Streaming takes the pressure off the box office. I could see Disney releasing fewer and fewer movies at the box office, focusing more on quality shows, and leveraging the combined might of Disney+ and Hulu.
Disney's ace in the hole
Disney has relied heavily on price increases to drive higher revenue and operating income from its parks. However, investors know that price hikes can only go so far before they impact demand and damage the product. That's why Disney is planning to invest around $60 billion in its Parks, Experiences, and Products segment -- doubling capital expenditures (capex) over 10 years.
While Disney has had a box office drought, the same can't be said at the parks, where it has released a slew of new thrilling rides in recent years that have been immensely popular -- like the opening of "Guardians of the Galaxy: Cosmic Rewind" in May 2022 and "Tron: Lightcycle Run" in April 2023. With plenty of land to expand its existing parks, allocating capital expenditures toward parks and other experiences like cruise ships seems to be the right long-term move, especially given the box office slump.
A recovery in the making
Despite the recent rebound in the stock, Disney is still far from its full potential. The business has yet to fire on all cylinders, but two cylinders may be good enough. If Disney can reach its streaming profitability goal by the end of fiscal 2024 and maintain momentum with its parks, we could finally catch a glimpse of what streaming and park full-year profitability looks like in fiscal 2025.
Analyst consensus estimates call for $4.68 in fiscal 2024 earnings per share (EPS) and $5.52 in fiscal 2025. That's trending in the right direction toward Disney's record year of $8.36 in fiscal 2018. At a price of around $113 per share, Disney has a price-to-earnings ratio of 24.1 based on its fiscal 2024 estimates and 20.5 based on its fiscal 2025 estimates. It's not a dirt-cheap valuation by any means, but it is a good value if you think Disney is on the right track and that streaming will be a net contributor to earnings growth in the future.
The stock could remain volatile based on investor sentiment toward Disney's profitability, spending, and content. Therefore, the best way to approach Disney is to think three to five years out about where the business could be rather than get too caught up with the success or failure of a movie or a single quarter's results.
