Walt Disney (DIS -0.04%) stock has gotten a lot of attention lately because it is hovering around a nine-year low. A lot of investors are wondering if now is the time to step in and buy Disney. But just because the stock price has fallen doesn't automatically make a company worth investing in.
If a stock gets hit hard and stays down for an extended period of time -- which has been the case with Disney -- it's usually for a good reason. Let's take a cold hard look at what the Dow Jones Industrial Average component has done poorly and what it is doing right.
Image source: Getty Images.
Where Disney went wrong
To understand where a company could be headed, we have to first revisit where it is coming from.
After a drought of box office hits, Disney's acquisition of Pixar in 2006 put its animation studio back on the map and proved to be a brilliant move. Disney followed up that purchase with the acquisition of Marvel Entertainment in 2009 and Lucasfilm in 2012. Then came the golden era of Disney's box office success, which included hit after hit from the Marvel universe and the Star Wars saga.
Fiscal 2018 and 2019 were arguably the best years in Disney's history. Net income peaked in 2018 at a staggering $12.6 billion and operating cash flow came in at $14.3 billion that year. Today, net income is about a fourth of that value.
DIS Net Income (Annual) data by YCharts
Disney was firing on all cylinders with box office records. And the parks were booming to boot. In March 2019, Disney announced it would buy 21st Century Fox. To make the deal possible, Disney would have to take on debt. But it didn't seem like too big of an issue at the time given how successfully every aspect of the business was performing.
In hindsight, the acquisition of 21st Century Fox was a mistake. It left Disney overextended headed into the COVID-19 pandemic. Fiscal 2020 and 2021 were lean years for Disney as its parks ground to a halt and movie theaters shut down. But the release of Disney+ in November 2019 proved to be a saving grace and subscriber growth surged past Disney's wildest imagination.
As was popular with streaming companies a few years ago, Disney tried to impress Wall Street with subscriber growth even if it meant the service was losing billions of dollars a year. It worked -- for a while at least -- as Disney stock hit an all-time high of over $200 a share in early 2021.
But then, Disney's overexpansion caught up to it. The perception of Disney+ quickly shifted from a growth engine to a money pit. And Disney's audience seemed burnt out from Marvel and Star Wars, with some moderate TV show and feature film success but overall muted results. Throw in rising interest rates and a challenging macroeconomic environment, and Disney suddenly looked like a company in a precarious position.
After all, the whole reason CEO Bob Iger felt the company had to build a streaming platform in-house was to make up losses from the declining traditional media and cable business.
Disney has found itself with practically everything going wrong all at once. It hasn't had success at the box office, or at least, success by Disney's standards. Its cable business continues to decline. Disney+ is still losing money although Disney has reaffirmed it will be profitable by the end of fiscal 2024.
And finally, the parks business is doing well, but investors wonder how long that can last if consumer spending continues to be strained as interest rates may stay high for longer than initially expected.
What Disney is doing right
Disney is in a much different position today than it was when it launched Disney+ nearly four years ago. On the creative front, the company seems like it is producing content for the sake of it without much direction on how much content to produce and what content its audience is going to really go for.
But to Disney's credit, the company has done an impressive job of cutting costs. And comments from Bob Iger and his team on the last few earnings calls indicate that Disney is hyper-focused on making the company leaner with an intense focus on profitability instead of growth. But that doesn't mean Disney is going to completely abandon growth opportunities.
In late September, Disney announced it would invest $60 billion into its parks and experiences segment, which includes cruise lines, over the next decade. This is a bold prediction, but I think we will look back on this announcement five years from now as the beginning of Disney's turnaround in the same way that the March 2019 announcement to acquire 21st Century Fox marked the era of overexpansion.
The massive capital commitment to parks and experiences is Disney's way of saying it's going to invest in what's working instead of what isn't working. And in a way, it admits that Disney has, at least for now, lost its touch at the box office. This is nothing new.
Throughout Disney's 100-year history, the company has gone through countless periods of creative slumps. And that's OK. What isn't OK is to keep throwing money at productions and hoping they work. By investing in the parks and cruise ships, Disney takes the pressure off Disney+ to be a growth driver.
Disney+ doesn't have to be the main act. And neither does the movie business. Rather, the key for Disney is not losing money on these endeavors by making each movie and TV show count. With the parks and cruise ships in the spotlight, Disney can focus on quality over quantity and avoid losing money at the box office.
It's worth mentioning that Disney's creative slump hasn't translated to the parks. In fact, its recent ride additions have been wildly successful. Guardians of the Galaxy: Cosmic Rewind opened at EPCOT in May 2022, which was crucial because EPCOT was lagging the other parks in terms of a show-stopping roller coaster.
Tron Lightcycle Power Run opened at Shanghai Disneyland in 2016. Disney copied that concept and opened the Tron Lightcycle Run at Magic Kingdom Park in April 2023. Both of these rides have been the equivalent of box office successes at Disney World.
The key takeaway here is that Disney's investments in its parks are paying off and the company is going to rely on the parks to make up for low growth from the box office -- a strategy that starkly contrasts with what transpired from 2006 through 2019.
A turnaround in the making
Disney got greedy with the acquisition of 21st Century Fox. And it got greedy with Disney+ by chasing subscriber growth at the expense of the financial health of the company. Wall Street has sent a clear signal to Disney that it is not tolerating overexpansion any longer.
Disney is turning to the parks with their high margins and strong bottom-line performance to save the company. And it's the right move. The stock has been crushed, but investors need to understand that a lot of the sell-off is justified.
Disney stock could start to look very cheap if Disney's investments pay off. But with a weak content slate lined up for fiscal 2024 and Disney+ still at least a year away from profitability, this investment could take several years to pay off.
Regardless, the opportunity is simply too good to pass up. Given Disney is making the right moves and is on track for a turnaround, it stands out as the best Dow stock to buy in October.
