The past three years have been challenging ones for Walt Disney (DIS -0.04%). Ditto for shareholders; the stock's still down more than 40% from its early 2021 peak.
Blame the COVID-19 pandemic, mostly. The contagion reshaped the entertainment industry landscape by accelerating the growth of competing streaming services while at the same time permanently damaging the theatrical film business. Like most of its peers, Disney wasn't ready for the rapid change.
Time eventually heals all wounds though. Now three years into the shakeup -- and with a veteran CEO back at the helm -- there's a light shining at the end of the tunnel. Walt Disney can be fixed, and the turnaround is already making progress.
Four arguments stand out as reasons to take a swing on Disney stock sooner rather than later, before the recovery rally makes any more progress.
Walt Disney is (finally) fixing streaming's profitability problem
When Disney first launched its flagship streaming service Disney+ back in 2019, profits weren't a concern. The media giant's first goal was establishing market dominance. Making the platform profitable would be something for down the road.
Well, the company is well down the road, but its streaming business (Disney+, ESPN+, and its stake in Hulu) is still in the red. The company's direct-to-consumer arm lost $216 million during the fiscal 2024 first quarter (ended Dec. 30).
These losses are shrinking though and will likely continue doing so. As CFO Hugh Johnston commented during the company's latest earnings call, "We still expect to reach profitability at our combined streaming businesses in Q4 of fiscal 2024 and have never been more confident about our path to creating a strong and sustainable streaming business."
This underlying improvement is partially the result of cost cutting. But future progress will also reflect a more optimized mix of streaming services. Disney intends to acquire the one-third of Hulu it doesn't already own sometime this year, for instance, pushing co-owner Comcast all the way out of the picture so Disney can manage and promote the platform in a way the best suits it.
Iger knows why films have been disappointing of late
Prior to the pandemic, Disney's film business was firing on all cylinders. In retrospect though, it appears the success was more about the franchises and intellectual property -- Star Wars and Marvel's Avengers -- than the filmmaking itself. The media giant's latest movies have been subpar, and its film business has also regularly been unprofitable.
That could be about to change, however. CEO Bob Iger conceded in an interview at last year's DealBook conference, "[Disney's] creators lost sight of what their No. 1 objective needed to be. We have to entertain first. It's not about messages." He added, "And I don't really want to tolerate the opposite."
It's still not entirely clear what that means in practical terms. It can take months to shoot a film and then many more months to edit and finalize it. The films being released right now are still largely those that were started under Iger's predecessor.
Now a year and a half since Iger was renamed CEO, audiences should begin seeing more films in line with Iger's vision, which worked when he was first at the helm between 2005 and 2020.
The proxy fight with Nelson Peltz and Trian could force an overhaul
Generally speaking, proxy fights like the one Walt Disney and activist investor Nelson Peltz are currently in are a significant nuisance to the targeted company. But that's not always a bad thing. Sometimes, such a nuisance can bring about much needed change.
Activist investing outfit Trian Partners -- led by Peltz -- is working to put at least three hand-picked directors on Disney's board. As Trian's message to shareholders explains: "We believe restoring the magic at Disney starts with a focused, aligned and accountable board, intensely committed to returning an 'ownership mentality' to the boardroom. That, and a heavy dose of best-in-class corporate governance is the medicine Disney needs to fix its ailing shareholder returns." With enough of its own voting members on the board of directors, such change becomes much more likely.
Iger and Walt Disney are pushing back, of course. They ultimately want the same thing Peltz and all other shareholders want, a higher stock price. The two parties simply have a different vision about how that should happen.
The thing is, nuisance or not, this sort of highly publicized verbal sparring often motivates management to make necessary changes ... if only as a means of fending off an activist investor's efforts to take control of a company.
Disney's brands are considered some of the best of the best
Last but not least, while Walt Disney may be struggling right now, there's no denying the company's properties are some of the very best names in their respective businesses. Its theme parks are the gold standard within the theme park industry, for example, while ESPN enjoys cable television's highest carriage fees for good reason. Walt Disney also owns television network AMC and several other cable channels including National Geographic and FX.
Then, there's its incredible catalog of film classics ranging from Snow White and Sleeping Beauty to more modern franchises like the aforementioned Avengers and Star Wars series. Even Trian believes Disney has "unparalleled assets and opportunities and every reason to grow and prosper." It just hasn't been using capitalizing on them all that well of late.
But the potential is there. Whether it's Bob Iger who taps it or someone else, the ingredients needed to return the company to its former magic exist.
Far from perfect but en route to recovery
Concerns remain, to be sure. For example, it's possible the planned $7.5 billion of cost cuts expected to be completed by the end of this year could prove more harmful than beneficial by crimping the company's ability to attract paying customers. There's also no denying the ongoing cable cord-cutting movement is working against Disney -- a headwind that may not be fully offset by the intended 2025 launch of a standalone streaming version of ESPN.
On balance though, for the first time in years, there's good reason for investors to be cautiously bullish on this stock. Disney's management has identified its problems and launched solutions to fix them. But waiting until they're completely resolved could mean missing out on the bulk of any brewing recovery for the stock.
