Walt Disney (DIS 0.16%) might be known for creating magical experiences, but 2022 has been far from magical for investors.
Share prices of the entertainment giant are down 39% year to date as growth in its streaming business slowed, losses widened, and investors lost faith in the company's strategy. Those issues reached a head just a couple of weeks ago when the board ushered out CEO Bob Chapek and brought Bob Iger, had led Disney from 2005 to 2020, back to run the company again.
Investors cheered the move, but there are more reasons than that to bet on a Disney comeback next year. Let's look at three of them.
Image source: Disney.
1. The streaming business is at a tipping point
Disney's streaming segment reported a loss of $4 billion in the recently ended fiscal year, but the management team had some good news for investors. The company now expects losses in the streaming division to narrow, as well as for Disney+ to reach profitability by 2024.
In December, the company will launch an ad tier for Disney+ and raise prices on its streaming service. Instead of offering the ad-based tier at a lower price, as is typical with a dual-tier model, Disney is raising the price on the ad-free tier from $7.99/month to $10.99/month and charging $7.99/month for the ad-based tier. This means the company will make more money off of subscribers, whether they choose to keep the ad-free subscriptions or accept ads. Disney is employing a similar pricing strategy on its streaming bundle that includes Hulu and ESPN+.
Management also said that it expected to pull back in marketing expenses in streaming, which would help improve the bottom line.
2. The stock looks undervalued
Disney's strengths are self-evident. The company has had the leading brand in family entertainment for generations. It owns popular theme parks around the world, and its flywheel business model maximizes the return on its vast collection of intellectual property, which serves as content for theatrical releases and streaming entertainment, themed rides and experiences at its parks, and consumer products like toys.
No other company can match Disney's arsenal of characters that range from classic Disney princesses to Marvel superheroes, or has the diversity of assets to fully leverage them.
However, the stock looks impaired because the company is in the midst of a transition from linear TV to streaming, which is impacting its profits. This means the stock doesn't necessarily look undervalued at a price-to-earnings ratio of 26.6.
Disney's parks, experiences, and products division brought in $8 billion in operating income last year, though historically that business has been less profitable than its media and entertainment division. If the company can get the media business back on the right track by controlling the decline in linear networks and improving the bottom line in streaming, the stock is likely to respond, especially if Iger can convince the market of the growth story again.
3. Mismanagement under Chapek has become clear
Now that Iger is back in the hot seat, it's become evident that the company was run poorly under Chapek. He alienated creative executives with the restructuring to prioritize streaming, and a number of them complained to the board. Even CFO Christine McCarthy, in an unusual move, expressed her lack of confidence in Chapek to the board after the company's November earnings call. Chapek and Iger, who held the title of Chairman after he stepped down as CEO, also feuded, and Chapek was criticized for bungling the response to Florida's "Don't Say Gay" law and for raising prices at theme parks too aggressively, frustrating customers.
There's no guarantee that Iger will magically solve all the company's problems, but he's got a head start, as he already has the respect of Disney's top brass and Wall Street. Iger is best known for directing a streak of savvy acquisitions during his tenure, including Pixar, Marvel, Star Wars-owner Lucasfilm, and Fox's entertainment assets, giving Disney a wealth of new intellectual property to put to work in movies, shows, and rides.
Iger has already gotten to work putting Disney back on the right path, dismissing Chapek's top lieutenants, promising a restructuring that will put storytelling at the center of the company, and indicating that layoffs are likely to come.
With morale at the company back on the rise, momentum from the streaming ad tier, and the right shift in strategy, it shouldn't be hard for Disney stock to recoup at least some of its recent losses.
After all, this is one of the world's top consumer brands and a company with a mountain of competitive advantages. With the proper management, the entertainment stock should reward investors in 2023 and beyond.
