Walt Disney (DIS +0.95%) recently reported its fiscal second-quarter earnings, and it's fair to say that investors weren't too impressed. The stock plunged by as much as 10% within hours of the earnings release.
To be sure, there were some good reasons. Disney missed expectations for top-line revenue, and its full-year guidance might be a little weaker than investors had hoped for. But most of the business is performing very well, so here's a recap of the latest results, what to watch going forward, and whether buying Disney stock could be a smart move.
Disney's fiscal second quarter looked strong (mostly)
As mentioned, Disney's revenue came in a little lighter than expected in the latest quarter, and 1% year-over-year growth isn't likely to get anyone too excited. But when we look a little deeper, the business is performing quite well.
NYSE: DIS
Key Data Points
For one thing, revenue growth throughout most of the business was strong. The Experiences segment (which includes the parks and cruise line) grew 10% year over year. The Walt Disney World Resort and Disney Cruise Line were both especially strong, as was Hong Kong Disneyland.
Entertainment segment revenue was the weakest, down 5% year over year, mainly due to the linear TV and film studio. Not surprisingly, the linear TV networks are suffering from lower ad revenue as fewer households subscribe to traditional cable and satellite TV services. And to be fair, film studio revenue was a tough comparison, with no big releases during the quarter (and compared to revenue from the Avatar sequel in the comparable year-ago period).
Within the entertainment segment, the direct-to-consumer streaming business, which includes Disney+ and Hulu, achieved profitability for the first time ever. Management reiterated that the entire streaming business, which also includes ESPN+, is on track to reach profitability by the end of the fiscal year.
Profitability and efficiency have been a major focus of CEO Bob Iger and his team, and it looks like their efforts are paying off. Adjusted earnings per share grew by 30% year over year, and free cash flow improved by 21% -- extremely solid growth, considering revenue barely budged.
Future catalysts and concerns
There are a few reasons to be optimistic going forward. For one thing, while the post-COVID surge in theme park spending has certainly leveled off, Disney is still in the very early stages of its $60 billion planned investment into its experiences business, which could create long-tailed demand growth for Disney's parks. The cruise line is planning to take delivery of several new ships within the next couple of years, and that industry is firing on all cylinders.
It's also worth noting that Disney+ and Hulu weren't just profitable, but they are growing as well. Disney+ in particular added 6 million members during the latest quarter alone and is getting more revenue per customer. As margins expand, this could be a faster-growing earnings contributor than many experts think.
Earlier this year, Disney announced plans to spend about $3 billion on buybacks during fiscal 2024, and the company spent $1 billion of it in the most recent quarter alone. With cash flow growing rapidly and returning capital to shareholders a big priority of Disney's management, this could be another driver of returns in the years to come.
All that said, there are certainly some reasons to be cautious. We still don't know much about the company's succession planning, and Iger doesn't want to remain CEO forever. Advertising revenue has come under pressure, especially in the linear TV business, and this could weigh on growth. Plus, there are still questions about the future of in-person movies (as opposed to streaming), so there's quite a bit of uncertainty in that part of the business, which Disney relies on for billions in annual revenue.
Is this a buying opportunity?
As any experienced investor can tell you, there's no more surefire way to make a stock's price go lower than to issue disappointing guidance, especially when it is accompanied by weaker-than-expected top-line revenue growth. But with Disney's massive streaming business on track to reach profitability in the fall, a massive investment in the Parks and Experiences business just getting started, and solid results throughout the business, now could be a great time for patient long-term investors to take a closer look.
