Walt Disney (DIS -0.79%) continues to be a market laggard. Shares of the media giant are trading lower in 2023, a sharp contrast to the general market that's been rallying this year.
Things aren't as bad as Disney's stock chart might suggest. Its business is holding up better than bears think. There are catalysts that could get the House of Mouse back on track. Let's take a closer look at why bargain hunters may want to consider adding Disney to their portfolio at this time.
1. The Disney+ turnaround is going better than expected
Disney stock briefly topped $200 to hit all-time highs in early 2021, fueled primarily by excitement for the fast-growing subscriber base at Disney+. The premium streaming service is largely the reason why the shares have been cut by more than half. Investors ignored the mounting losses to get Disney+ off the ground, but it's a new narrative these days. The Disney+ helmed direct-to-consumer segment saw its operating loss widen from $1.7 billion in fiscal 2021 to more than $4 billion last year. The negative trend is finally starting to reverse.
Disney's direct-to-consumer segment is still losing a lot of money, but its operating deficit through the first nine months of fiscal 2023 has contracted to $2.2 billion. Disney expects the segment to be profitable by the end of next year.
Cost controls at Disney+ have a starring role in CEO Bob Iger's plan to realize $5.5 billion in annual savings companywide by the end of next year. Earlier this month that goal was revised for Disney to "exceed" those initial annualized expense reduction goals. Disney will also be raising prices in October for ESPN+ and ad-free versions of Hulu and Disney+ by 10%, 20%, and 27% respectively. This follows double-digit-percentage increases late last year. Disney+ will also be expanding its ad-supported tier outside of the U.S. market in November. Disney wouldn't be bumping prices higher and expanding its ad-backed offerings if it wasn't thriving on both fronts.
Image source: Disney.
2. Disney isn't dead at the multiplex
There have been a few theatrical whiffs for Disney's movie studios in recent years, but it's still a force. It has four of the 10 highest-grossing films domestically in 2023. The news is even better overseas, particularly for some of its films that were initially written off as duds. Elemental barely topped $150 million in the U.S., but its worldwide box office receipts are now up to $458 million. It's the first Disney film since last year's Avatar: The Way of Water to generate more than two-thirds of its ticket sales internationally.
Hollywood strikes threaten the pipeline of future releases as we head into next year, but Disney is far from dead. Despite the company being caught in political crossfire on its home turf, it's still a booming brand for theatergoers in the much larger international landscape. With Iger making it a priority to check the quality of upcoming multiplex-bound features -- and global audiences returning to theaters -- it's another area where things should get better for Disney.
3. The Iger contract extension is a good thing
Iger came back to Disney as its CEO on a two-year deal last November. It was doubled to a four-year assignment this summer. The stock is trading lower than it was when his return was announced and when the extension was unveiled last month. It doesn't mean that Iger isn't succeeding.
He will need time to get the turnaround right. It's no longer a mad scramble to end the losses at Disney+ by the end of next year. There is now more wiggle room to buy or sell assets, make long-term improvements for all of its businesses, and do a better job of tapping a successor than he did the last time.
4. Theme parks are still leading the way
Lost in the stock's slide since its peak in early 2021 is that its theme parks business has never been better. Even Disney World -- where turnstile clicks slowed in its latest quarter -- is still posting revenue and operating income that is 21% and 29% higher than its pre-pandemic highs of fiscal 2019.
Major additions are coming to its resorts at Hong Kong and Shanghai later this year. Disney will face a new threat in central Florida with the arrival of Epic Universe in 2025, but that is another reason for Iger to stick around until 2026 to make sure that Mickey Mouse is ready.
5. The stock is historically cheap
Trailing results are depressed by losses at Disney+ and the slow-footed global pandemic recovery. The future is brighter. Disney is now trading for just 17 times projected earnings for the new fiscal year that begins in October. Go out to fiscal 2027 and the multiple drops to just 10.
Media stocks in general are out of favor. The industry's transition from linear networks to streaming services has been rough on the top line and downright brutal on the bottom line. Disney is one of three media companies to jack up prices for their premium streaming platforms by at least 20% this summer.
It's no longer a race to the bottom for media stocks. It's a smart place to be for investors pining for a turnaround play. Disney has been and will continue to be a leader. It has historically commanded a market premium. It's cheap now if the recovery happens gradually. It's really cheap now if the upswing happens even faster and profit targets start shooting higher.
