Disney (DIS 0.81%) shares are anything but magical these days. In fact, the entertainment stock has dropped back to the low levels it hit early in the pandemic, when its theme parks were closed and the market was panicking. Disney has struggled over the past year with higher costs driven in part by its enormous investments in its streaming services. Today, the shares are trading in the neighborhood of $100.
But brighter days may be ahead. In a surprise move, Disney recently brought back longtime Chief Executive Officer Bob Iger. His two-year mission is to put the company back on track and name a successor. With limited time to get things done, Iger should make a good deal of progress in the coming months. Could his efforts push Disney to $125 in 2023?
An expensive bet on streaming
First, let's take consider Disney's current situation. The company has bet heavily on success in the world of streaming. And it's getting there when it comes to membership. In its fiscal 2022, which ended Oct. 1, Disney added 57 million subscribers to its trio of streaming services -- Disney+, ESPN+, and Hulu -- bringing the total to 235 million.
But higher programming, production, and marketing costs at Disney+ and Hulu resulted in the segment's operating loss widening from $1.6 billion in fiscal 2021 to $4 billion for fiscal 2022. Average monthly revenue per paid subscriber also fell at Disney+.
The company still expects Disney+ to reach profitability in fiscal 2024, now-former CEO Bob Chapek said during the November earnings report -- if economic conditions don't worsen.
NYSE: DIS
Key Data Points
At the same time, there is a bright spot. Disney's parks, experiences, and products segment -- historically the company's biggest contributor to revenue -- continues to grow. For the year, its revenue climbed 73% to more than $28 billion. And throughout the fiscal year, demand at Disney's theme parks remained strong. They continue to be the top-visited parks worldwide.
Even before Iger's return, Disney was already planning on increasing prices for its streaming services -- and those new prices and ad-supported plans launched last month. The company also put a freeze on hiring for some jobs and moved to rein in certain business costs such as travel.
Iger's first days
In his first days on the job, Iger said he would start by reviewing the company's cost structure. It's clear that he doesn't plan on aggressively investing to gain new streaming subscribers if those subscribers won't lead to earnings growth.
He also aims to refocus Disney on creativity. Most recently, Iger made a move to bring employees back to the office four days a week -- a policy he said is intended to foster creativity and communication. The CEO also hopes to improve the theme park experience by offering certain services for free -- like parking for resort guests.
How have the shares responded? They climbed about 6% in the days following Iger's appointment. Since then, though, it looks like investors have decided to wait for proof that he truly can turn things around at the company. Let's get back to our original question. Will Disney hit $125 this year?
Disney's share price advanced about 400% during Iger's original 15-year tenure as CEO -- and earnings climbed too. It's also important to note that Disney's share price has generally gained in the past when its sales and net income rebounded.
And when revenue started to recover from its early-pandemic dip during the latter part of 2020, Disney's share price took off.
A 30% gain?
For Disney to reach $125 this year, it would have to gain about 25%. That seems like a reasonable goal -- if the company can start showing an improvement in cost control and it's reflected in upcoming earnings reports. Iger has a strong track record at Disney, so there's reason to believe he can help the company through today's tough times.
So, is Disney a buy? Disney trades for 22 times forward earnings estimates -- down from more than 40 a year ago. That's after slipping more than 40% last year. Considering the strength of Disney's parks business and the new efforts being made to cut costs and spur growth, the stock looks dirt cheap. Disney's magic may be back soon. And this time, it may be lasting.
