If you're a consumer of Walt Disney (DIS -0.04%) content, it might feel like everything at the entertainment giant is business as usual. But if you're a shareholder, you probably know that there's a lot of turmoil going on under the surface. Between the Hollywood writers' and actors' strikes, its cash-burning streaming services, the decline of cable, and more, Disney's business faces major hurdles.
Yet, there's still magic happening at the House of Mouse -- and strong reasons to think Disney could emerge from these troubles as a greater company.
The bullish argument: It has great parks, great potential
Disney is the largest entertainment company in the world, and that's not going to change anytime soon. It has developed a formidable operating model that begins with creative teams churning out popular characters and franchises. That intellectual property is then used as the basis for a range of additional assets -- more content, toys and other products, theme park rides, and more -- that bring customers further into the Disney ecosystem and expand the revenue-generating cycle.
That's why Disney is almost synonymous with entertainment although many consumers may not even realize the extent to which Disney dominates at the box office. It owns several film production studios that operate under other names, among them 20th Century and Pixar. So far this year, Disney's studios delivered four out of the top 10 highest-grossing films, and in most recent years, its share of the top 10 has been at least that high, and often higher.
But what also stands out about Disney is its absolute dominance in theme parks. There's little competition for the kinds of real experiences Disney can offer anywhere in the world, between its huge parks and the Disney-owned experiences that no one else can provide.
After their complete shutdown during the early stage of the pandemic, Disney parks have reopened to huge success, and demand has soared, driving high sales growth. In the company's fiscal 2023 third quarter, which ended July 1, parks segment revenue increased 13% year over year, and operating income increased 11%.
CEO Bob Iger recently announced that Disney is going to invest $60 billion in its parks, and considering its current challenges, that seems like the right idea. It's putting its funds in its strongest differentiating segment, which has shown over decades that it can connect with customers and drive the business higher.
This is how Disney uses its strengths to drive revenue, relying on its time-tested model to bring magic to fans and money to its coffers. This is what should pull it through now and provide meaningful growth opportunities for years to come.
The bearish argument: It's floundering in a sea of problems
Whenever you're dealing with a company of this size and breadth, there will be better-performing parts and worse-performing parts. When the entire operation is working together in harmony, investors cheer. Even when not every segment is humming, if the good aspects outweigh the bad, the company will satisfy investors.
Right now, though, Disney is experiencing several problems at once, and the combination threatens to weigh down the whole operation. The rise of streaming looked like an incredible tailwind for the company when Disney+ premiered right before the pandemic started, but now that it has captured a good chunk of the market, management is trying to pivot its streaming business from growth to profit generation.
While in its fiscal third quarter, it cut expenses by about half year over year, they still came in at more than half a billion dollars. Meanwhile, it's still in a heated battle with the other premium streamers that are going through the same struggles. Everyone's fighting for their slice of a limited pie, and each one is negotiating its own balance between creating compelling content, reaching new subscribers, and cutting costs.
At the same time, its longtime broadcast TV and cable businesses are struggling due to the cord-cutting trend. Traditional linear television is suffering as advertisers gradually move more of their marketing budgets over to ad-supported streaming networks, while cable's long, slow demise is in progress.
Disney might eventually decide to sell some of these assets, such as the ABC television network or part of the ESPN sports channel. In fiscal Q3, linear networks -- the segment that houses these businesses -- saw sales decline 7% year over year while operating income fell 23%.
Finally, let's not forget the recently ended writers strike and the still-ongoing actors strike. These have slowed production and inhibited creative activities for film studios, and their impacts could reverberate for some time.
CEO and board changes
It hasn't been quiet on the Disney front for a while. The latest news came from The Wall Street Journal, which reported that institutional investor Nelson Peltz's Trian Fund Management had upped its stake in Disney to more than $2.5 billion and was making another attempt to get on the board and influence company decisions.
When Peltz did something similar last year, Iger was already back as CEO and making the requested changes, so the activist investor backed down. Now, it appears that Peltz doesn't think necessary expense management efforts are happening fast enough. Just after the activist investor news broke, Disney announced new price hikes at its parks.
The likelihood is that Disney will get its act together soon and return to delivering higher revenues and profits. It also promised to reinstate its dividend by the end of the year. Disney stock looks like a tempting buy trading at its lowest prices in almost a decade, but I would wait to see further business improvements before taking advantage of the opportunity.
