Earnings season is in full swing, and one of the most highly anticipated financial updates came from Walt Disney (DIS 1.01%). The business reported revenue and adjusted earnings per share that came in ahead of expectations, but shares are down about 4% as of this writing, on the day of the announcement.
That weakness continues an ongoing slump for the beaten-down media and entertainment stock, which trades a gut-wrenching 57% below its March 2021 peak. Before you rush to buy the dip, though, learn about the key bull and bear arguments.
Disney's bull case
I think four notable factors will make investors appreciate this company. For starters, Disney possesses one of the widest economic moats. It's supported by unmatched intellectual property (IP).
There's perhaps no other business in the world that has Disney's content, from Pixar and Marvel to Lucasfilm and Disney Animation. This helps to differentiate the company from competitors and has kept it relevant for decades.
Not only does Disney possess this IP, but it's also able to monetize it in several ways. This so-called flywheel means that Disney can spend billions on the production of shows and movies and generate revenue from theater tickets through its linear networks, streaming platforms, parks, and the sale of consumer products.
The COVID-19 pandemic was a major disruptor to Disney's experiences segment, which houses the just-mentioned theme parks, as well as its cruise line. But this division has come roaring back. Its fiscal 2024 third-quarter (ended June 29) revenue and earnings before interest and taxes (EBIT) were 28% and 29%, respectively, higher than in the same period in fiscal 2019.
As a pleasant surprise, Disney's combined streaming services, which include Disney+, Hulu, and ESPN+, posted an operating profit in Q3. Management had originally hoped this would happen by the fourth quarter. The goal, of course, is that this is just the beginning of rising income for this division, which has historically burned through billions in cash.
NYSE: DIS
Key Data Points
Disney's bear case
There are some hard-to-ignore downside factors to consider with this business. I can think of three important ones.
Disney's current CEO, who also held the top job from 2005 to 2020, is viewed as one of the best executives in recent memory. However, it can be argued that he missed the boat launching Disney+ way too late. The company's flagship streaming service hit the market in 2019, a full 12 years after Netflix was launched in the U.S.
Another bear argument is that Disney's direct-to-consumer (DTC) segment will never fully replace the profits of the once-thriving linear networks. ABC and ESPN are under pressure from households cutting the cord, but they used to be cash cows that raked in high-margin and recurring revenue. It's hard to tell if the DTC operations can match the impressive 30% operating margin the linear networks registered in fiscal 2010.
I applauded the theme parks earlier, but this segment is starting to report a slowdown, with revenue up just 2% in the last fiscal quarter. If a recession hits, there's almost no doubt that Disney's experiences division will take a hit, particularly as consumer spending weakens.
Is it time to buy the stock?
Disney's bullish case holds significantly more weight than the bearish arguments. There's a lot more to like about this business than there are reasons to be doubtful. But to be clear, there's a ton of uncertainty in the near term as the company navigates the changing media landscape.
Nonetheless, the stock's massive dip tells me that the market has probably overreacted to the downside, setting up patient investors for solid returns over the next three to five years as fundamentals improve.
