The magic is gone for Walt Disney (DIS -0.45%) stock -- at least, for now. The stock is within just $5 of its eight-year low and is down 56% from its all-time high. And it is underperforming the S&P 500 for the third straight year in a row.
Investors are looking for answers and losing patience. And although there isn't a lot to get excited about for now, there's reason to believe the pessimism has gone too far. Disney CEO Bob Iger reminded investors of Disney's most powerful quality on the fiscal Q3 2023 earnings call: the depth and breadth of its business.
Let's discuss some of the levers the media company is pulling to drive profitability, why the parks business is so much more than just Disney World, and why the long-term future is bright for Disney.
Image source: Getty Images.
The power of its Parks, Experiences, and Products segment
Walt Disney World and Disneyland often come to mind when we think about Disney's parks. But there's also Disneyland Paris, Tokyo Disney Resort, Hong Kong Disneyland, and the most valuable international park, Shanghai Disneyland.
The international parks, particularly in Asia, were hit especially hard by the COVID-19 pandemic. Prolonged lockdowns, inconsistent restrictions, and back-and-forth policies made it challenging for Disney to manage all the moving parts that come with opening, closing, and reopening theme parks.
So naturally, it was the domestic parks that carried the results the last couple of years. But amid challenges of record heat waves and slowing attendance at Walt Disney World, it has been the international parks that have come to the rescue.
In the quarter, all of Disney's international parks posted higher year-over-year operating income. Shanghai Disney posted record-high revenue, operating income, and margins. Hong Kong Disneyland, which had three reopenings in 2020 and was closed from Jan. 7, 2022, until April 21, 2022, is recovering better than expected and is rapidly growing revenue, operating income, and attendance.
Although Walt Disney World is facing slowing growth, it's still doing extremely well. Compared to pre-pandemic levels in fiscal 2019, Walt Disney World posted 21% higher revenue and 29% higher operating income in Q3 fiscal 2023 (when factoring in accelerated depreciation for the failed Starcruiser project).
Disney's cruise line is yet another business unit that had ground to a halt during the pandemic but has come roaring back. Fourth-quarter capacity is 98% booked for Disney's five-ship fleet, with two more ships on the way in fiscal 2025 and another in fiscal 2026.
The quarter showcased the power of Disney's expansive offerings, both by business unit and geographically, and is a reminder that the overall business can still do quite well even if there's a setback at a high-profile park like Walt Disney World.
The cable business is still very profitable
Disney's traditional media business, which it refers to as linear networks, remains a juggernaut and a key contributor to operating income despite losses at Disney+.
Disney talks a lot about the acceleration of customers cutting the cord. But Linear Networks brought in $1.89 billion in operating income for the quarter, offsetting $515 million in losses from Direct-To-Consumer (DTC) and $243 million in operating losses from Content Sales and Licensing. Overall, though, Linear Networks' operating income is falling, down 23% compared to the same quarter last year.
It's a race against the clock for Disney to supplement declines in its Linear Networks' operating income with gains from DTC driven by Disney+, Hulu, and ESPN+. Disney is confident that Disney+ will be profitable by the end of fiscal 2024, which would ease the strain on Linear Networks. Eventually, the goal is to change Disney+ from a money-losing business to a growth business that can combat declines in Linear Networks instead of the other way around.
That vision is likely several years away, but in the meantime, it's encouraging to see Linear Networks remain a key contributor to Disney's bottom line.
A long road ahead
Disney remains one of the most powerful brands in entertainment and media. But when a stock is struggling to the extent that Disney has, it's easy to lose sight of the pros and focus only on the cons.
Coming out of the pandemic, investors hoped that Disney's parks would rebound in lockstep with encouraging growth from Disney+. The first part of that wish has come true. But Disney+ is losing paid subscribers and is still unprofitable.
Until Disney+ proves its value, Disney stock is likely to remain at depressed prices. But if you zoom out and think about where the company could be five years from now, it's easy to envision the core business doing well and renewed excitement for Disney+.
Some investors may want to buy the stock now and wait for Disney to recover, and others may not mind avoiding the risk and waiting instead for the recovery to play out, even if it means buying Disney stock at a higher price down the road. The choice ultimately comes down to your confidence in Disney's execution and your risk tolerance. Because even though Disney has a great plan, it still must still deliver on its promises to investors.
