Disney (DIS -0.52%) stock hasn't been a magical place for investors to park their cash in 2023. The shares slipped below the market's 7% year-to-date return in mid-May following a fiscal second-quarter earnings report that disappointed Wall Street.
That quarterly update contained bad news around Disney's weak short-term earnings prospects. And the TV segment continued to struggle with declining advertising revenue. But the good news is that management is pivoting the streaming business toward profitability, in part by dramatically scaling back on the amount of content it makes available through its subscription and ad-supported platforms.
Baby steps
Disney's direct-to-consumer business improved this past quarter, in accordance with management's early 2023 forecast. Higher subscription prices and declining marketing costs allowed operating losses in the segment to improve to $200 million from $700 million a year ago.
Executives chose to highlight this shift in a press release describing the wider second-quarter results. CEO Bob Iger said, "We're pleased with our accomplishments this quarter, including the improved financial performance of our streaming business."
The road ahead
Investors are likely to see much bigger improvements over the coming quarters. Management explained in a conference call with investors that aggressive cost cuts are on the way, mainly tied to content production. "It's critical we rationalize the volume of content we're creating and what we're spending to produce our content," Iger said.
At the same time, subscription prices are rising and advertising revenue is projected to grow into a much bigger source of profits over the next few years. Disney is still aiming to increase its streaming audience, too, with help from its massive library of brands and franchises.
A tough earnings outlook
The bad news is that Disney's financial struggles will likely worsen before the situation starts improving. The company will take an impairment charge of nearly $2 billion in the fiscal third quarter as it removes some of its more-expensive streaming content and reduces its pace of new content production.
DIS operating margin (TTM), data by YCharts. TTM = trailing 12 months.
Investors have already seen Disney's wider profitability slump over the past few years. Its operating margin is now holding around 8% of sales compared to its pre-pandemic normal rate of over 20% of sales. The main factor pushing shares lower in recent months is the prospect that any rebound here will be slow. It's still unclear whether Disney's pivot toward direct-to-consumer content in its media business will lead to fundamentally weaker margins.
Keep watching Disney stock
Investors will have some key questions answered on this score over the next few quarters. The best-case scenario pairs subscriber growth with declining costs so that the streaming platforms begin contributing operating income to the wider business after several years of losses. On the downside, Disney might be forced to trade slower user gains for improved profitability.
Either way, the earnings pressure from the streaming segment is primed to end in fiscal 2023. The prospects for shareholders' overall returns will depend on whether Disney can then pivot its large platform into a sustainably profitable business in 2024 and beyond.
