Walt Disney (DIS 0.58%) is often the first stock in a portfolio for new investors, drawn by its storied legacy and knack for resonating with younger demographics. Yet the entertainment giant's stock has disappointed in 2023 with a decline of 9% versus the benchmark S&P 500's return of 17%. What's worse, Disney shares recently hit a five-year low amid serious questions about its leadership and certain segments of its business.
Let's examine what has gone wrong for Disney and whether its stock collapse has created a potential buying opportunity.
Why is Disney stock struggling?
Beyond Disney's stock-performance woes in 2023, it has generated a 27% loss over the past five years. Investors may have taken issue with the revolving door in leadership, with longtime CEO Bob Iger retiring in early 2020, only to return in late 2022 after his hand-picked successor, Bob Chapek, stepped down.
Additionally, Disney's linear-television segment, led by ABC and its 80% ownership stake in ESPN, has seen steep declines in revenue and operating income (profit from core operations). This segment was previously a bright spot for Disney, but as consumer habits ditch linear television for streaming, it will likely continue to decline. The segment's revenue for fiscal Q3 2023 slipped 7% year over year to $6.7 billion while operating income fell 23% to $1.9 billion.
To counter the weakness in linear television, Disney has poured resources into its streaming, or direct-to-consumer (DTC), segment, particularly Disney+, and its majority-ownership stake in ESPN+ and Hulu. As a result, DTC revenue has skyrocketed over the past five years from $827 million in fiscal Q3 2018 to $5.5 billion in fiscal Q3 2023. Just looking at revenue growth, you might think the transition has been a tremendous success.
Still, when examining operating income, the DTC segment has only expanded Disney's losses, with a negative $2.2 billion result during the company's first three fiscal quarters of 2023. For comparison, the company incurred a loss of $2.5 billion over the initial three fiscal quarters of 2022. This indicates that the DTC operating income has merely seen a modest 12% improvement, suggesting it may have a substantial journey ahead before achieving profitability -- if that milestone can be reached at all.
Is there any hope for Disney's stock?
Despite Disney's stock's performance over the last five years, the company does have some bright spots. Most notably, operating income for its parks, experiences, and products segment is up 20% year over year to $7.6 billion in the first three quarters of fiscal 2023.
During Disney's most recent quarterly-earnings call, management attributed some of that success to its cruise line, which was inoperable during the pandemic. Management also noted that the cruise line was 98% booked for its fiscal Q4 and that the company plans to expand its fleet of five ships to seven over its next two fiscal years.
Image source: Getty Images.
Returning to the bigger picture, Disney is growing its free cash flow (a profitability metric) after it understandably dipped during the pandemic. Specifically, the company generated $2.8 billion in free cash flow over its trailing 12 months, demonstrating possible positive momentum compared to its fiscal 2021 and 2022 results of $2 billion and $1 billion, respectively.
With its growing free cash flow, Disney has paid down its net debt (total debt minus cash and cash equivalents), which peaked in mid-2019 at $51.5 billion. That is now down to $35.7 billion as of the company's most recent quarterly statement, a prudent move given that high-interest rates are weighing down many publicly traded companies.
DIS Net Financial Debt (Quarterly) data by YCharts.
Finally, Disney's management recently stated that it expects to recommend to its board of directors that it reinstate a "modest dividend" by the end of 2023. This would be a welcomed reversal among investors, as the company suspended its longtime dividend in early 2020 due to the COVID pandemic.
Is Disney stock a buy?
Whenever a blue-chip stock such as Disney reaches a five-year low, it's worth investigating whether it could rebound or fall even further. In Disney's case, it is convenient to attribute its underperformance to the pandemic. Still, it is equally vital to factor in the CEO turmoil and a concerning long-term trend affecting its linear-television segment.
For Disney to rebound, the company's streaming services must become the new growth driver. Although Disney possesses a treasure trove of intellectual property, encompassing entities such as LucasFilm, Marvel Studios, and Pixar, it has yet to demonstrate profitability in its streaming segment. Until it can convincingly do so, it would be prudent for investors to remain cautious and monitor what has been a dreadful turn for the former high-flying stock.
