While many tech companies flourished throughout the pandemic thanks to home-bound consumers investing in new office and entertainment equipment, companies like Disney (DIS -0.12%) suffered considerable losses from the shutdown of movie theaters and theme parks.
And even as the pandemic lessens, Disney's stock is still down 37% year to date as it works to reclaim its losses. The company has made significant changes to its business, with a major push into the streaming industry. The move has paid off as Disney overtook Netflix for the most streaming subscribers in its latest quarter. Additionally, the company saw its parks business surge, signaling that guests are returning.
Disney has been a dominating force in the entertainment industry for decades. Let's see what could be ahead for the company and its investors now.
A stock market sell-off
With the S&P 500 and Nasdaq Composite down 23% and 33% since the start of the year, it's clear that Disney's share price has mostly been dragged down by the overall market decline. Companies across multiple industries have suffered at the hands of soaring inflation, rising interest rates, and geopolitical factors.
Entertainment companies like Netflix have seen their share price fall more than 50% in 2022, while Comcast's similarly plunged 40%. The streaming industry as a whole has concerned investors who fear entertainment subscriptions will be the first to go as consumers cut discretionary spending.
In addition to market declines, Disney investors also pulled back in May after second-quarter results led to concerns over the rising cost of its flagship streaming service Disney+. From May 4 to June 14, the House of Mouse saw its share price fall almost 19% after its Q2 2022 results reported a loss of $887 million in its direct-consumer segment, which includes Disney+. The report was only exacerbated when Chief Financial Officer Christine McCarthy said in an earnings call that Disney+ growth could slow in the second half of 2022.
Macroeconomic factors and a costly streaming business have made investors pessimistic about Disney's immediate future. However, since its dismal second-quarter results, the company has taken strides to right its ship; investors may just need time to see those changes take effect.
Is Disney stock a buy?
Despite losses in Q2, Disney reported a glowing third quarter on Aug 10. Results for the period beat analysts' expectations. Revenue rose 26% year over year to $21.5 billion, while income from continuing operations more than doubled to $2.12 billion.
However, the most notable improvements came from Disney's Parks and Streaming business. Parks revenue soared 70% to $7.39 billion as guests returned in droves after the pandemic closures.
Additionally, Disney hit a milestone in its streaming business by surpassing Netflix for most streaming subscribers, with 221.1 million members (including Disney+, Hulu, and ESPN+). Disney+ gained 14.4 million subscribers during the quarter, an increase of 31% year over year.
The positive quarterly results caused Disney's stock to jump 7% on Aug 10, but it has done little to rally investors since then. The company's third quarter may have eased some doubt about Disney's streaming business, but Wall Street remains wary as fears of a recession grow.
However, Disney's stock is a solid buy for the long term. After reporting significant losses in its streaming segment in Q2 2022, the company introduced price hikes across all of its services and plans to launch an ad-supported tier to Disney+ in December. Both changes should increase the company's average rate per user and boost revenue in the long run.
If a recession hits, the company will likely see some declines, but they won't last forever. Disney's stock has been brought down by a dismal first half of the year, alongside a stock market sell-off affecting multiple companies. However, with a price-to-earnings ratio currently at 65% less than it was a year ago, now might be the perfect time to buy shares in Walt Disney.
