Disney (DIS 1.18%) shareholders continue to suffer as the stock just can't seem to lift off. It's posting many successes, but investors are fixating on its problems. You can't blame them too much, since instability can topple even the best-laid foundations.
Let's look at the good, the bad, and the ugly to see if this is an opportunity to buy on the dip or a waste of your investing dollars.
The good
Disney is a powerhouse entertainment brand that has little competition in its league. It's the marquis name in theme parks and experiences, owns top-producing film studios, has an unmatched content library, and now operates a leading streaming business.
With parks closing down at the beginning of the pandemic, it had to take steps to stay alive, including suspending its yet-to-be-reinstated dividend. But parks are back with a passion. In the 2023 second fiscal quarter (ended April 1), the parks segment drove a 13% company revenue increase with its own 17% rise over last year. Operating income increased 23% for the segment, but that wasn't enough to counteract a 42% drop in the media and entertainment segment, which dragged down company operating income by 11% from last year.
Higher profitability was fueled by higher prices at parks and on cruises, which Disney was able to implement due to increased demand. What remains uncertain is how demand will hold up after the initial flood since doors reopened, and how sustainable the increases will be.
Disney watchers have also been pleased with the return of mega-CEO Bob Iger, who investors have some confidence can nurse the company back to health before handing over the reins -- again.
The bad and the ugly
Cord-cutting continues to plague Disney's legacy media channels, and the linear networks division revenue fell 7% from last year in the second quarter. Even worse, operating income from this division fell 35%, leading to the drag on the segment. This is further impacted by advertisers cutting their budgets as inflation impacts their businesses.
Streaming remains an issue, as even though Disney is now one of the leading players in the field, it continues to post operating losses. Those improved in the quarter from $887 million to $659 million, as management promised, but it looks like a long road to profits, despite management's insistence that it will become profitable by the end of next year. It added the caveat that its guidance is built around factors that include a good level of uncertainty, and the past few years have brought a whole lot of uncertainty.
Disney, like most other streamers, is having a hard time finding the balance between content creation, marketing, and efficiency. Netflix has achieved some level of balance here, but now it's facing new challenges, including increased competition and saturation. So while streaming is clearly in the cards for the future of media, it's not easy to make it a profitable business.
Films have also been a letdown recently at the box office. None of Disney's highly anticipated releases this year, including The Little Mermaid and the new installment in the Indiana Jones franchise, have materialized as the hits Disney was expecting. And now the company is dealing with the Hollywood writers' strike.
Finally, Disney will need a new CEO at some point to shepherd it forward. It renewed Iger's contract through the end of 2026 even though he was only supposed to come back for a two-year transition period. That smacks of instability and isn't a great show of confidence in Disney's ability to be a great company without a specific CEO. Long-time CFO Christine McCarthy is also exiting the company, leaving it with a dearth of management to lead it forward.
The verdict on Disney stock
Disney is still the company to beat in media and entertainment, and that doesn't look like it's going to change anytime soon. Most of the problems it's experiencing are affecting its competition in the same ways too.
The likelihood is that Disney gets its act together and goes back to being a company in growth mode and a top blue chip stock. However, that could take a while, perhaps several years.
But for long-term investors seeking great companies to set-and-forget, Disney stock shows promise. After all, it's trading at a cheap valuation of 23 times forward 1-year earnings. With its long-standing prowess and its long-term opportunities in mind, now could be a good time to buy. After all, in time, Disney's stock price should rise to meet its value.
