If you're a Walt Disney (DIS 0.18%) shareholder, your portfolio isn't the happiest place on Earth right now. The entertainment giant's stock was trailing the wider market through early November, and the shares fell again in the wake of its fiscal Q4 earnings results on Nov. 8.
The big headline from that report was Disney's questionable returns from all the spending it directed toward the Disney+ streaming service in the past few years. Management has a plan to fix that segment so that the wider business can return to steady earnings growth.
Should investors buy into that uncertain rebound thesis? Let's take a closer look.
The bad news
Disney just posted unusually weak sales and earnings trends to close out its fiscal 2022. Yes, revenue soared in the parks and resorts division, which handled higher volumes, increased ticket prices, and robust demand for food and merchandise. But the wider business increased just 9% due to weaker results in the broadcast and streaming-service segment.
That unit saw pressure from declining advertising sales and lower average prices for the Disney+ service, which was increasingly marketed as part of a bundle. That approach helped Disney achieve solid subscriber gains, but at a high cost.
Disney+ reported increasing losses for the period, in fact. It turns out that Netflix executives were right back in mid-October when they implied that Disney and other rivals are losing lots of money right now. "It's hard to build a large and profitable streaming business," they said at the time.
The rebound plan
Disney isn't resigned to just pouring more cash into a service that isn't profitable. Management is planning price increases, a new advertising-supported feature, and slower content spending in some areas.
They signaled in a conference call with investors that it was finally time to pivot toward higher margins. "Building a streaming powerhouse has required significant investment," CEO Bob Chapek said. But now that Disney+ is approaching 235 million subscribers, it should start showing decelerating losses in the current quarter before achieving profitability in fiscal 2024.
Is it a buy?
Investors have been rattled by the implication that Disney+ will remain a drag on earnings for at least another year. It won't be clear until fiscal 2024, at the earliest, whether all the spending on building up a direct-to-consumer streaming platform has generated positive returns.
In the meantime, Disney is exposed to other big pressures, including a potential global slowdown or recession that could hurt sales growth in 2023. Investors might be tempted to look past those short-term concerns and buy the stock today, given that shares are trading below their pre-pandemic valuation of around 3 times sales. Disney's price-to-sales ratio has slumped to 2.1 times today, compared to 6 times sales as recently as early 2021.
DIS PS Ratio data by YCharts.
Some of that slump makes sense, given that Disney has posted several years of weakening earnings. Operating income landed at $3.2 billion over the last 12 months, translating into just a 3.9% profit margin.
It isn't clear when or if Disney will return to its prior pattern of market-thumping profitability of over 20% of sales. Investors might prefer to watch for signs of progress here over the next few quarters before deciding to buy the stock at today's discounted prices.
