A big risk with the stock of Walt Disney (DIS -1.01%) these days is that the company's streaming service, Disney+, remains unprofitable. Management did raise monthly subscription fees on it, and there are encouraging signs that the direct-to-consumer (DTC) segment is on the right track. Unfortunately, its media and entertainment business remains sluggish and is facing multiple headwinds.
The segment continues to weigh down earnings
When Disney reported its latest earnings numbers earlier this month, it showed good growth in its parks and experiences segment. Second-quarter operating income was strong, rising 23% year over year to nearly $2.2 billion for the period ending April 1. The problem, however, is that its media and entertainment business, which includes its Disney+ streaming service and its content creation, continues to drag overall operating income down.
Source: Company filings. Chart by author.
A deeper dive into the media and entertainment distribution segment shows a mixed bag, with the company's DTC business reporting smaller losses than in the prior-year period. But its linear networks segment saw a $1 billion drop in operating earnings.
Source: Company filings. Chart by author.
The company's linear programming business contains revenue from its domestic and international channels. Revenue from the domestic segment was down 4% while international channels brought in 18% less revenue from the prior-year period.
Disney has also been incurring higher costs relating to programming while at the same time noting a slowdown in affiliate and advertising revenue.
A weak ad market is something many companies have been struggling with over the past year as concerns about an impending recession led businesses to trim ad budgets.
A further complication is the ongoing Writers Guild of America strike, which could not only interrupt the content that is available on Disney+ and other streaming services but also end up leading to even higher content and programming costs, thus putting more pressure on the company's already struggling media and entertainment business.
Is Disney's stock due for a decline?
Over the past 12 months, the share prices of Disney have fallen 10%. But even with the drop in price, the stock still trades at a hefty earnings multiple of over 40. That's steep given that the company's overall revenue growth was lackluster in recent quarters, which can make it difficult to justify the stock's current premium. By comparison, the S&P 500 averages an earnings multiple of just 19.
DIS revenue (quarterly YoY growth) data by YCharts. YoY = year over year.
The long-term outlook
With rising costs, the writers' strike, and an ongoing feud with Florida's governor, Ron DeSantis, there are plenty of reasons to expect that things could get worse before they get better for Walt Disney. The company faces some concerning headwinds, and when combined with a high valuation, it could lead to a softer stock price in the months and weeks ahead.
But for long-term investors, now can be a great time to load up on the entertainment stock as Disney is trading around the levels it was at during the 2020 market crash. If you're willing to be patient, this can be a good stock to buy on weakness. That's because Disney's streaming service is showing signs of progress with improved profitability, the ad market will inevitably improve, and the company's parks business remains resilient. Those are all good factors that outweigh the negatives that shouldn't impact the business in the long haul.
