What happened
Shares of entertainment giant The Walt Disney Company (DIS -0.40%) zoomed up by 25% in January, according to data provided by S&P Global Market Intelligence. The entertainment company benefited from the success of Avatar: The Way of Water, and investor confidence in the value of streaming services generally was bolstered by news that Netflix had added millions of new subscribers in the fourth quarter.
So what
Disney stock has been taking investors on a wild ride worthy of one of its own hit films since the pandemic started. Its various business units have been moving up and down at different times, but the company as a whole has been showing progress.
It has taken the title of streaming king from Netflix several times as the streaming operator with the most subscribers, and the pattern seems to be that the crown goes back and forth between them. However, Disney has been booking soaring bottom-line losses from its streaming business as it scales it up. The rollout has been going according to plan, but investors are growing weary of watching the company pour money into a seemingly bottomless pit.
Management still claims that Disney+ will be profitable by 2024, but on the fourth-quarter earnings call, they added a caveat to that prediction: "assuming we do not see a meaningful shift in the economic climate." Anticipating investor reaction to the increased losses in its fiscal 2022 fourth quarter (which ended Oct. 1), management said it was beginning to realign its cost structure with operational efficiency. Management said profitability -- or lack thereof -- would show improvement in fiscal 2023's first quarter.
Netflix reported 7.7 million net new streaming subscriptions in Q4. That result buoyed investor sentiment about Disney's streaming business as well. Disney will report its fiscal 2023 first-quarter results on Wednesday.
Beyond the streaming drama, there was also the CEO saga. Bob Chapek was replaced by Bob Iger in November, and while that move was cheered on Wall Street, Iger's return to the top job is planned to be short term, so there might be more instability in store.
In a positive development, the long-awaited film Avatar: The Way of Water, which was released in December, moved into the No. 4 spot on the list of highest-grossing films of all time.
Now what
Volatility has soured investor confidence, and Disney stock is still down 22% over the past year. Investors want to see progress on turning Disney+ into a profitable operation, but there's unease about the streaming market, which looks like it's nearing saturation.
The parks and experiences unit has been demonstrating strong performance. But the company implemented price hikes to make that happen, which would also make it seem vulnerable.
Despite these issues, Disney remains the largest entertainment company in the world, with a vast media library and many ways to increase revenue. If it reports improved performance in streaming this week, the stock is likely to jump significantly on the news, and it may climb further from there. Either way, the company's long-term potential is still compelling.
