It's been over nine months since I called out seriously deteriorating issues at Disney (DIS +0.01%), and now over eight months since CEO Bob Iger returned and I said I'd patiently wait for a turnaround story to emerge. Things have arguably gotten much worse since then.
The latest blow to the House of Mouse is Hollywood writer and actor strikes. Iger said recently on a CNBC Squawk Box interview that writer and actor strikes "are adding to a set of challenges that ... [the media industry] is already facing that is quite frankly very disruptive and dangerous." With that said, is Disney stock dead money, or is Iger's strategy to get Disney back on track still viable?
NYSE: DIS
Key Data Points
What's at stake for Disney?
Of course, Disney has more going for it than entertainment disrupted by writer and actor strikes. What would Disney be without those world-class parks?
Except there's a problem there too. While Disney's Parks, Experiences, and Products segment is just one-third of the company's total revenue, it accounted for two-thirds of operating profit in the last quarter and 82% of operating profit during the first half of fiscal 2023. And as good a growth driver as theme-park attendance has been in the "revenge travel" frenzy, reports have been surfacing that attendance is faltering so far this summer. Looks like revenge travel won't be the growth driver it had been the last couple of years.
That leaves the Media and Entertainment Distribution segment, Iger's problem child, which needs revamping in order to help offset some of the coming weakness in theme parks (two-thirds of revenue but less than 20% of operating profit so far in fiscal 2023). Indeed, there are some good signs emerging here. Content sales and licensing got a boost from the Avatar 2, which hauled in $2.2 billion globally in the months following its December 2022 release. In a backtrack on Disney's streaming entertainment focus of the last few years, Avatar 2 followed a more traditional path, where it went through a video sell-through window after its big screen run and then on to Disney+ last. Iger apparently was happy with those results.
But the rest of the media and entertainment empire is a mess. Linear networks (broadcast and cable TV) revenue and operating profit are down 6% and 29%, respectively, in the first half of fiscal 2023, prompting Disney's top brass to consider creative alternatives for properties like ABC and the old live-sports crown jewel ESPN. Consumers are cutting the cord en masse and moving to streaming, and the former TV breadwinners are suddenly showing their age.
Disney's "creative alternatives" could include an outright sale of TV channels, or perhaps even getting outside investment in some properties like ESPN from professional sports leagues.
Compounding problems, not compounding growth
Now this is why the actor and writer strikes are so crucial. Pre-production and production of TV shows and movies can have a ripple effect that lasts a long time. Remember the sparsity of new content for a couple years following economic lockdowns in 2020? Something similar could be in order. A number of TV and movie projects have already halted production, and movie theater release dates could get delayed.
New content is key to keeping eyeballs glued to screens. If content distribution gets lean in the coming years, Disney may not be able to divest what it deems to be non-core TV channel assets at very favorable prices to itself.
Meanwhile, the future of content distribution is streaming, and Disney+ has stalled out. Actually, so has ESPN+ and Hulu for that matter. All together, Disney's streaming entertainment offerings are still losing hundreds of millions of dollars every quarter. Streaming entertainement leader Netflix (NFLX +0.39%) suffered a similar fate, bleeding cash for years, while working to build its 200 million-plus global subscribers (the bleeding for Netflix, however, has finally stopped).
|
Disney Streaming Service |
Subscribers of April 1, 2023 |
YoY Increase (Decrease) |
|---|---|---|
|
Disney+ Core |
104.9 million |
1% |
|
Disney+ Hotstar |
52.9 million |
(8%) |
|
ESPN+ |
25.3 million |
2% |
|
Hulu |
48.2 million |
0% |
Data source: Disney.
For all intents and purposes, it appears the media conglomerate business model of yesteryear is suffering a slow death, and not even Disney's enviable portfolio of entertainment franchises like Marvel and Star Wars can save it. Iger still has a tremendous amount of work cut out for him, which is no doubt why his (second) tenure as CEO was recently extended to 2026. Hollywood strikes are going to seriously complicate those efforts.
For now, I remain content to see how Disney's plan to refocus plays out. I don't want to sell low. But this has been one of my bottom-of-the-barrel investments over the last decade with a total return of just over 40%. If you're looking for an entertainment investment for the long term, there are probably better buys out there right now.
