Walt Disney (DIS 0.93%) is the premier entertainment company in the world, and it's been experiencing a roller coaster of a ride (perhaps Space Mountain?) over the past two-and-half years. Combine those with a CEO saga that includes an ousting and the return of its star leader just six weeks ago, and you have all the makings of a hit studio film.
Except that this is real life, and investors follow the fast-paced drama to help inform their decisions. So leaving the drama aside, what do smart investors know about this blue-chip industry leader? Let's take a look.
1. Its various revenue streams balance each other
It's easy to follow the ups and downs of Disney's revenue, which has been fluctuating since the onset of COVID-19. It's finally surpassed pre-pandemic levels, which surely brings some relief to investors.
However, smart investors realize that Disney's revenue is made up of many different parts. Prior to a reorganization in 2021, Disney reported four separate segments. Those were consolidated into two segments: media and entertainment distribution, and parks, experiences, and products. Returning CEO Robert Iger indicated that those would change again.
Because Disney has such large and varied revenue streams, the total business has been able to demonstrate a rebound. And although revenue has continued to steadily increase since a huge decline at the beginning of the pandemic, it's not the same segments that have been generating the recovery.
At the beginning, streaming played a huge role in driving sales while people were under lockdown. In the 2021 second quarter (ended April 3), for example, sales from the parks segment decreased 44%, while direct-to-consumer revenue increased 59%. That was fueled by Disney+, which was just over a year old and enjoyed a 209% increase in subscriptions year over year.
In the 2022 fourth quarter (ended Oct. 1), the most recent one, parks revenue increased 36% year over year, while direct-to-consumer increased only 8%.
2. It can raise prices on its exclusive products
Many companies are struggling with the impact of inflation and how to balance raising prices and increasing costs. Disney, though, doesn't appear to be struggling at all, at least in that sense.
Disney has raised prices across its sectors, from streaming to parks. Disney+ went up in price from $7.99 to $10.99 per month in December, with an ad-supported tier remaining at the lower price. It's expected that the ad revenue for that tier should compensate for its lower price. The streaming price hike is of particular importance because investors have soured on the premium channel's huge losses as it continues to roll out in global markets.
Last month Disney also raised prices on tickets to Walt Disney World, including multi-day and annual passes. The soaring demand to get in gives Disney leverage to thin out visitors. It also raised prices on value-added services such as the Genie skip-the-line service.
One thing to keep in mind is that this is taking effect when visitors are still clamoring to get back to Disney parks after missing them when they were closed. Will Disney be able to reap the benefits of increased prices once fans have made those trips? Management is betting on that being a yes.
We'll hear some of the preliminary information on how well the price increases are going when Disney reports first-quarter earnings on Feb. 8.
3. Free cash flow has seriously dropped
You didn't think this list was going to be completely positive, did you? Take a look at Disney's net income and cash flow generation over the past 10 years.
DIS Free Cash Flow data by YCharts
Although sales have now surpassed pre-pandemic numbers, free cash flow and net income both remain well below.
Notice that Disney shored up cash as net income dropped at the beginning of the pandemic. It has yet to reinstate its dividend, which it suspended at that time. On the flip side, even when income turned to losses in 2020, Disney remained cash-flow positive throughout. That's indicative of a strong business.
Do the positives outweigh the negatives here? I think so. Smart investors notice the red flags and warning signs that almost every company is going to have. Then they put them in context along with the rest of the story to see whether good practices and opportunities outweigh those flags or vice versa.
Disney has huge potential and is already staging a comeback. With its stock down 40% over the past year, now might be a great time to buy shares.
