The 2022 bear market has been brutal, with the S&P 500 still down 12% over the last 12 months. Walt Disney (DIS 2.46%) is underperforming the index, with its share price down a whopping 33% over the same time frame. But while the company hasn’t adapted well to the post-pandemic economy, its long-term outlook looks bright. Let’s dig deeper.
What went wrong for Disney?
The height of the COVID-19 pandemic was a complicated time for Disney because of its many different revenue streams. While in-person entertainment options like amusement parks and cruises saw revenue plummet amid the lockdowns and movement restrictions, its new streaming platform Disney+ soared to become a market leader. Investors initially seemed satisfied with the trade-off, but it didn’t last.
With a 44% decline, 2022 was one of Disney stock’s worst years on record. And while some of this downside had to do with the Federal Reserve’s rate hikes (which can hurt equity valuations), Disney’s company-specific challenges are also mounting.
In the fiscal first quarter, revenue grew by 8% year over year to $23.5 billion. But operating income fell by 7% to $3.04 billion as the parks and experience division struggled to defray losses in streaming. That said, Disney’s massive investments into streaming may pay off over the long term — especially as new management focuses on cutting costs.
Streaming could become a profit driver
Disney has replaced its former CEO, Bob Chapek, with his predecessor Bob Iger, who aims to focus on profitability, especially in streaming. To pull this off, the company is implementing layoffs and cost-cutting, which will involve eliminating 7,000 jobs and hopefully generate $5.5 billion in cost savings — $3 billion of which will come from the content budget. This is fantastic news for investors.
According to Statista, Disney spent a whopping $33 billion on content in 2022, far surpassing its closest rival Netflix, which spent just under $16 billion. While big-budget shows based on Star Wars and the Marvel Cinematic Universe were key to Disney’s rapid streaming growth, now the company can rest on its laurels (to an extent) and begin to reap the benefits of its now immense direct-to-consumer empire.
As of the fiscal first quarter, Disney’s direct-to-consumer platforms (Disney+, Hulu, and ESPN+) boast a whopping 234.7 million subscribers, compared to Netflix’s 230.75 million. To put this into perspective, Netflix generated an operating profit of $5.63 billion in 2022.
And while Disney might not be able to fully replicate this number, it gives an idea of how value accretive the streaming business could become if management can improve its margins. Disney expects its direct-to-consumer efforts to become profitable by 2024.
The valuation is still reasonable
With a price-to-earnings (P/E) multiple of 23, Disney trades at a small premium to the S&P 500 average of 21. But while it faces a lot of challenges ranging from slowing subscriber growth to cash burn, it seems unjustifiable that shares are worth less now than before Disney+ even launched. The streaming business looks capable of overcoming its challenges and becoming a cash cow over the long term, and the current share price weakness is a buying opportunity.
Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix and Walt Disney. The Motley Fool recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.