Walt Disney (DIS -1.10%) is the largest entertainment company in the world, with an unmatched content library and a varied set of reliable revenue drivers. It's one of those stocks you can count on. Or is it?
Disney has been plagued by one problem after another in recent years, and hopeful investors keep experiencing setbacks. Disney stock is up 10% this year after investors reacted positively to its most recent earnings results, but it's still down 35% over the past three years.
Being a Disney shareholder has become a bit exhausting. Will the company finally get its act together and begin to reward (very) patient shareholders again within a year from now?
Why investors continue to have confidence in Disney
Disney creates its magic through its top creative talent, which churns out content through a tried-and true model. It develops films, franchises, and characters that sometimes fail but overwhelmingly become popular with fans, leading to more content, products, and theme park attractions based on its media creations.
Streaming became a major element of this strategy when it launched Disney+ at the end of 2019. It quickly became a top player in the industry, and it added another 7 million subscribers in its fiscal 2023 fourth quarter (ended Sept. 30).
Streaming -- through Disney+ as well as general-content streaming network Hulu and sports streamer ESPN+ -- is now a cornerstone of the Disney model. It's in a league with streaming leader Netflix, with the two of these companies representing the top tier of streaming networks.
Revenue has been creeping up, increasing 5% over last year in the fourth quarter. Earnings per share from continuing operations rose from $0.09 last year to $0.14 this year.
Theme parks have returned to being an anchor for Disney, and sales from this segment increased 13% year over year in the quarter. CEO Bob Iger recently announced a $60 billion investment in parks over the next 10 years, and that's a smart move. Attendance continues to be robust at the theme parks, and they provide the experiential part of the Disney ecosystem that keeps fans loyal.
But these weren't the reasons investors cheered the fourth-quarter results.
Two steps forward, one step back
Disney has been feeling extreme pressure from investments in streaming. It still claims Disney+ will be profitable by the end of 2024, but streaming still posted a $400 million operating loss in the fourth quarter. As bad as that sounds, it's actually a $1 billion improvement over last year, and that was a win that investors approved.
It's still weighing heavily on the bottom line, though. Total operating income increased 86% over last year to nearly $3 billion driven by the lowered expenses in streaming, but the operating margin was 9.8%. That's still a far cry from where it was before the pandemic.
DIS operating margin (quarterly); data by YCharts.
Can Disney ever reach those previous margins? In one year from now, it probably won't. The likelihood is that they'll continue to improve, as they have since bottoming out when the pandemic started. But it's slow going. Next year, expect profitability to improve, and according to management, for streaming to become net profitable.
There's much more than streaming
However, Disney+ losses are only part of the company's headaches. Cord-cutting is leading advertisers to shift their money to streaming, and while Disney+ is benefiting with its recently launched ad-supported tier, its traditional broadcast TV business is losing those same dollars. The cable TV networks are struggling as well.
There's been talk about Disney selling its ABC network and part of ESPN. By next year, some of that should be resolved, and Disney could be in a much stronger position. Iger has done it before, and investors trust that he knows the company better than anyone else and can do it again. But that's just the optimistic scenario. It could still be dealing with ongoing problems next year.
Lastly, Disney's slate of films due for release has been delayed by union strikes. That will affect revenue in the near term. Its summer film list didn't perform as well as expected, and that could lead to concern that its creative model isn't what it used to be. It's something to keep an eye on, but I wouldn't be too concerned based on one summer season.
There's too much going on at Disney, with its large range of businesses, to say with any certainty where it should be next year. The optimistic scenario is one possibility, but it's not a given. Investors might want to wait for more progress on more fronts before taking a position.
