Disney (DIS +2.09%) didn't offer investors a very magical story last year. That's because the entertainment giant struggled with higher costs as it invested to grow revenue at its streaming services. The stock price sank more than 40% for the year. And the company brought back longtime chief executive officer Bob Iger to put Disney back on the path to growth.
Iger has since taken action, and his strategy is starting to bear fruit. As a result, Wall Street is optimistic about the company's potential share performance. In fact, analysts predict Disney shares will climb by 29% in the coming 12 months. Should you buy the stock right now -- or should you be wary?
Theme parks, movies, and cruises
First, a little background on the situation at this Fortune 100 company, known for its theme parks, cruises, blockbuster movies, and streaming services. Over the past few years Disney has focused on growing its streaming business -- particularly Disney+.
The effort and investment worked, if we look at it from a subscription perspective. In the last fiscal year, Disney's streaming services added 57 million subscriptions, to reach a total of 235 million. But that growth came at a cost. The operating loss at the direct-to-consumer unit -- which houses streaming services -- soared nearly 140% to more than $4 billion.
And some feared Disney had strayed from its superpower: storytelling. Enter Bob Iger. The company called back the former CEO, and one of his first steps was to reorganize departments to favor creativity. He gave creative teams more power to make decisions and take responsibility for their projects.
Iger also pledged to focus on quality of content over quantity. And he cut jobs as part of efforts to target $5.5 billion in cost savings.
The efforts are starting to show in Disney's earnings. The operating loss at the direct-to-consumer business narrowed in the fiscal second quarter to $659 million, from $887 million in the year-earlier period. Disney launched an ad-supported tier for its streaming services in the U.S. last year, and plans to do the same for Disney+ in Europe this year. And later on this year, Disney will increase the price of its ad-free subscription plan. All of this should help the company approach its goal of profitability for Disney+ in the 2024 fiscal year.
NYSE: DIS
Key Data Points
The strongest revenue driver
Meanwhile, Disney's parks, experiences, and products unit -- traditionally its strongest revenue driver -- continues to deliver. In the most recent quarter, the business's revenue and operating income climbed by double-digit percentages.
All of this sounds good. But Disney still may face some headwinds in the coming months. Consumers have felt the impact of higher interest rates on their wallets. And now, with the Federal Reserve modeling for a recession later this year, consumers may be even more concerned about spending on discretionary items -- like trips to Disney parks, or a higher-priced subscription to the company's streaming services.
So, should you be wary of analysts' share price forecast for Disney? Yes. First, I want to note that I'm optimistic about Disney stock over the long term -- and I would recommend buying the stock today. After all, the shares are trading for only 21 times forward earnings estimates. That's half the level of early last year. And it's a bargain considering the company's long-term prospects.
However, I wouldn't expect the shares to climb as much as some analysts predict in the coming 12 months. Considering today's tough economic environment, and the potential for a recession ahead, it may take Disney shares longer to achieve a significant percent change. But that wouldn't stop me from buying shares of this top entertainment company and holding on for the long term.
