Shares of Walt Disney (DIS 0.76%) have plunged about 55% since peaking in early 2021. Back then, Disney's parks and films businesses were still reeling from the pandemic while the streaming business was gaining subscribers at an unearthly pace. Today, the situation has flipped, and that has investors worried.
Streaming slowdown and linear TV troubles
Disney still relies on linear television to generate a significant amount of its operating profit. That's a problem because linear TV is probably doomed. On-demand and streaming platforms are winning out, and the days of cable companies paying lucrative fees to channels are fading as consumers cut the cord. For Disney, which owns ABC, ESPN, and a handful of other channels, this means that the linear TV business is going to be under increasing pressure as time goes on.
In the quarter that ended on April 1, Disney's linear network segment saw revenue slump 7% and operating income tumble 35%, both on a year-over-year basis. ESPN in particular is becoming a thorn in Disney's side. In the good old days of cable, ESPN brought in enough fees to more than justify the expensive deals to air sporting events. But as cable subscribers dwindle, the revenue ESPN contributes dwindles as well. Sports deals aren't getting cheaper, leaving ESPN in quite a pickle.
NYSE: DIS
Key Data Points
Streaming can be the answer, but Disney has yet to turn a profit despite an enormous subscriber base. A recent price hike for its Disney+ service is helping the bottom line, but pandemic-era subscriber gains have now given way to minimal growth. In the quarter ended April 1, Disney+ shed 2% of its subscribers globally, while ESPN+ grew by 2% and Hulu was essentially unchanged.
The direct-to-consumer business brought in $5.5 billion of revenue in the quarter, nearly as much as linear networks, but that revenue was paired with a $659 million operating loss. Disney is working to cut costs, but the company needs to prove to investors that streaming can be a source of sustainable profits.
Reasons to buy Disney stock
While Disney is still figuring out how to make its vast media business work in the age of streaming, there are still two good reasons to buy the stock.
First, the parks and experiences businesses are booming. Parks, experiences, and products brought in $7.8 billion in revenue and $2.2 billion in operating profit in the latest quarter, with both metrics up double-digit percentages. Disney's international properties are bouncing back after a tough few years, and the company's cruise line added more passenger days and the new Disney Wish ship.
The main reason to buy Disney stock, though, is the company's decades-long track record of leveraging its vast catalog of characters, content, and other intellectual property to drive results across its entire business. Disney has one of the strongest brands in the world, and it owns a collection of media assets, including Marvel and Star Wars, that can fuel its streaming and film business for years to come. Disney's parks can then turn those stories into new areas and attractions, further strengthening the brand.
Disney is valued at about $167 billion. That works out to about 23 times the average analyst estimate for full-year earnings, but it's important to remember that Disney's bottom line is depressed by losses in the streaming business. Earnings have the potential to grow rapidly as streaming is brought to profitability.
Disney is a great company going through some tough times. The pessimism that has driven the stock down is an opportunity for long-term investors to pick up shares of this iconic company at a reasonable price.
