Walt Disney (DIS -0.04%) has been struggling to generate revenue growth. It has been looking at a lot of different ways to potentially unlock value for investors and to help its slumping stock rally. Recently, it announced a deal which could set its sights on gaming, and a segment that investors may have thought Disney gave up on: the metaverse.
Disney's investment in an "entertainment universe" may sound like déjà vu
On Feb. 7, Disney announced that it would be working with Epic Games to create new games as well as an "entertainment universe" that will expand experiences for its customers. It's going to invest $1.5 billion into Epic Games, the maker of Fortnite, to help grow this project. In addition to offering games, this new universe will also allow consumers to shop and to engage with content and characters.
What it sounds like is the metaverse, part two. Back in 2021, then-CEO Bob Chapek talked about creating a "Disney Metaverse" which would bring physical and digital worlds together. "Metaverse" was the big buzzword of 2021, when Facebook changed its name to Meta Platforms and went on to spend billions of dollars for its Reality Labs division.
While Meta continues to spend big on the metaverse, Disney appeared to give up on the project. It was about a year ago that Disney eliminated its metaverse division, which was part of a larger corporate restructuring as the company worked on improving its bottom line. The division had approximately 50 people.
Nowadays, the metaverse has more of a negative connotation since it hasn't lived up to the hype of a few years ago. That could be why Disney isn't so eager to mention it.
Is this just another long shot for a company that may be in desperation mode?
Disney has been in the news a lot in recent months. In addition to its investment in Epic Games, here are some other developments which could impact investors' outlook for the stock:
- Disney reinstated its dividend late last year and has increased it by 50% already.
- It has also announced that ESPN will partner with Warner Bros. Discovery and Fox Corp. to launch a streaming sports service, which will be available later this year.
- There have been rumors that activist investor Nelson Peltz may try to break up the company to help improve profitability.
A sore spot has been the company's streaming service, Disney+, as it continues to be a drain on the business. During the last three months of 2023, the company's direct-to-consumer business incurred a loss of $138 million. While that was less than the $984 million loss it incurred a year earlier, the segment's lack of profitability has been a concern for investors.
In five years, shares of Disney stock have declined by 5% as the company has struggled to find ways to create value for investors. Even amid a rebound from the pandemic and pent-up travel demand, its results have proven to be underwhelming.
My concern is that if Disney is going after the metaverse again, there could be more expenses to endure for a business that already needs to get leaner and more profitable. At 23 times estimated future profits, the stock looks expensive given that the company's top line was flat last quarter.
Should you buy Disney stock today?
I'm not optimistic that spending money on digital worlds, or the metaverse -- or whatever Disney wants to call it -- will be a good idea for the business. It does appear that the company is trying to do many different things to drive up the value of the business, and that has me concerned about the lack of a clear direction.
Disney isn't a stock I would buy right now. This is a business that seems to be heading toward a crossroads, and it wouldn't be surprising to see it split up into different companies. With so much going on, the safest option for investors may be to step back and take a wait-and-see approach. Disney has some great brands and assets in its portfolio, but with so many different balls in the air right now, it may be a good idea to just see how everything plays out before deciding whether or not to invest in the stock.
