The past three years have been tough for The Walt Disney Company (DIS 0.84%). Ditto for shareholders. After soaring during the first half of the COVID-19 pandemic, Disney stock has been upended by a combination of rising costs, waning interest in theatrical films, the ongoing demise of cable TV, and an activist investor.
End result? Walt Disney shares are priced at half of their peak reached in early 2021, and falling again. Experienced investors, of course, know such dips are buying opportunities. This one is no exception. Although Disney stock may or may not have reached its ultimate low yet, it's likely nearer one than not.
Oh, there's still plenty of risk here, to be sure. The media and entertainment company's turnaround is a work in progress, and it's not exactly clear when Disney will fully shrug off its challenges. But its four most-serious stumbling blocks are finally being moved out of its path. Here in no particular order:
1. The proxy battle with Nelson Peltz is in the past
Trian Partners founder and activist investor Nelson Peltz didn't mince words after taking on a sizable stake in The Walt Disney Company. In a public letter penned early last year, Peltz notes:
"Trian believes that Disney's recent performance reflects the hard truth that it is a company in crisis ... While we acknowledge that Disney, like many media companies, is undergoing a challenging pivot to streaming, Disney also benefits from owning best-in-class intellectual property, a more diversified business mix, and a Parks business that is enjoying all-time high profitability. As such, we believe that the Company's current problems are primarily self-inflicted and need to be addressed immediately."
Peltz then spent the next several months trying to force Disney's management into implementing the overhauls he felt shareholders deserved to see. As you can imagine, that effort was at times contentious to the point of being distracting. Peltz's ideas were also occasionally at odds with Disney management's plans.
Now, whatever turbulence Nelson Peltz's involvement was creating is gone. Trian sold its entire stake in Disney last month, allowing the company's top brass to get back to focusing on their own turnaround agenda.
2. Its streaming business is profitable -- and increasingly so
It's long been a sore spot for investors, but the wound is healing. That is, Walt Disney's streaming business is now -- finally -- operationally profitable.
It's a "just barely" situation, mind you. During the three-month stretch ending in March, the company only turned $47 million of Disney+ and Hulu's $5.6 billion worth of revenue into operating income. (ESPN's streaming revenue is booked separately.)
Look at the trajectory of this arm's results. Revenue is still growing, and earnings are improving at an even faster clip.
Data source: The Walt Disney Co. Chart by author. Figures are in millions.
There is one detail regarding this progress to consider: Much of it is rooted in cost cutting. It's working now. But it's not inconceivable that the media giant will cut costs so much that its streaming business becomes difficult to market.
On the other hand, its direct-to-consumer customer headcount is still growing despite continued price increases, and viewership ratings agency Nielsen says people -- at least, in the United States -- are watching about as much Disney+ and Hulu as they ever have. If less content or lower-quality content were going to be a problem, it likely would have become evident by now.
3. Disney is finally making its move with ESPN
Speaking of streaming, a streaming version of cable television's lauded sports channel ESPN is set to launch sometime in the latter half of 2025.
This is no small development. ESPN's growth since debuting in 1979 was largely tethered to the growth of cable television in the United States. Cable TV's customer base peaked at a little over 100 million U.S. households in 2012, however, and has been steadily declining ever since. Numbers gathered by nScreenMedia suggest there are only around 60 million cable-subscribing households left in the U.S. This figure's apt to keep shrinking too.
The obvious impact is a lack of opportunity for continued revenue growth. There's a less-obvious problem suggested in the trend, however. That is, consumers are cutting the cord not just because they're finding other ways to watch sports, but because they're increasingly interested in other forms of entertainment besides sports.
But don't panic! While the competition for consumers' time is fiercer than ever, there are still plenty of sports fans out there who will gladly pay for a stand-alone streaming version of ESPN even if they're not interested in paying for a full-blown cable plan. Data from Standard & Poor's suggests that roughly three-fourths of consumers paying for any streaming service are also regular sports watchers.
At the same time, about two-thirds of cord-cutters still find a way to tune into sporting events. In other words, sports fans are out there. They're just waiting on a streaming service that could prove more lucrative for Disney than the cable version of ESPN currently is.
4. Analysts say Disney stock is undervalued
Last but not least, take the hint the analyst community is dropping. Of the 30 analysts currently covering Walt Disney, 19 of them rate the stock as a strong buy, with three more calling it at least a buy. Their consensus-price target of $125.36 per share is also more than 25% above the Disney stock's present price.
NYSE: DIS
Key Data Points
All analyst calls should be taken with a grain of salt, of course. After all, they can be wrong too. On the flip side, investors should be wary of believing they know something that analysts covering a high-profile ticker like this one are missing. Walt Disney's businesses aren't complicated ones to gauge, and the company itself -- for better or worse -- is transparent.
Keep it in perspective, but...
Is it an "all in" kind of pick for your portfolio? No. As was noted above, there's lingering risk. It's not clear that consumers will ever be as interested in watching a movie in theaters as they were prior to the pandemic, for instance. Disney's theme parks are also falling a bit out of favor. Given that these two businesses have traditionally been among the company's bigger moneymakers, softness on either front now is a concern.
Disney stock's present price arguably reflects a little too much concern and not enough of the things now working in the company's favor. That's the right time to jump into a new position in a proven company like Walt Disney, which even Nelson Peltz acknowledges is "one of the most advantaged consumer entertainment companies in the world, with unrivaled global scale, irreplaceable brands, and opportunities to monetize its intellectual property."
Disney is just finally doing something constructive again with all this potential.
