US stock markets have rallied handsomely in 2023. The Nasdaq Composite ($NASX) had its best first-half performance in four decades while the S&P 500 ($SPX) rose more than 15% to have the best start to the year since 2019. However, Disney (DIS) was barely in the green, with gains of about 3%.
Disney has Pivoted to Streaming
Disney is among the most iconic global brands and is the proverbial “cradle to grave” business, as it has something to offer to every age group. The company has historically been known for its parks and animated movies. And in 2019 it also pivoted to streaming.
The pivot was quite successful in terms of numbers, and in the first 16 months after launch Disney+ surpassed 100 million users. After accounting for Hulu and ESPN+, Disney now has more streaming subscribers than streaming giant Netflix (NFLX).
While the pivot might seem hugely successful considering the massive growth in subscribers, Disney’s streaming business is unprofitable and its losses peaked at $1.47 billion in the fiscal fourth quarter of 2022 that ended in September 2022, which reflects the toll that the streaming war has taken on industry players.
Disney Reappointed Bob Iger as CEO
That fiscal fourth quarter earnings call in 2022 turned out to be the last one for Disney’s then-CEO Bob Chapek who was removed from his position in November, just days later.
Disney reappointed Chapek’s predecessor Bob Iger as the CEO. Notably, it was Iger under whose watch Disney pivoted to streaming and the business gained traction under Chapek. The growth in Disney’s streaming business was also aided by the COVID-19 lockdowns as streaming subscribers grew exponentially in 2020.
Soon after he took over, Iger embarked on his mission to transform Disney. He reversed some of Chapek’s decisions and shifted the focus back to creativity.
Chapek also ended Disney’s work-from-home policy and stressed that working in a team environment works best for a creative company like Disney. He also took harsh measures and announced 7,000 layoffs in a bid to cut costs. Among others, the layoffs impacted the company's metaverse segment.
Can Bob Iger Turnaround Disney?
Among the most important strategic moves under Iger in the past 8 months has been to shift the focus from streaming subscriber growth to increasing profits. The company’s streaming losses narrowed to $659 million in the March quarter and are now less than half of their last year's peak. The company however lost 4 million streaming subscribers in the most recent quarter. Subscriber growth is no longer the top focus for Disney and it also withdrew its fiscal year 2024 subscriber guidance.
Iger also reorganized the business into three units: Disney Entertainment, ESPN, and Disney Parks, Experiences, and Products. In contrast, Chapek put streaming at the heart of Disney’s business and had restructured the business to reflect the same.
While Disney stock rose initially when Iger took over, it has since sagged – as is visible in its dismal price action in 2023 which has now pushed it to levels even below when Iger took over last year.
Disney is Working to Improve the Experience at Its Theme Parks
Disney is taking several measures to improve its operating as well as financial performance. It has taken actions to improve the customer experience at its Parks in the US and has allowed annual pass holders to visit the parks on certain days without prior reservations.
It is also expanding its international parks and is adding a line inspired by the popular Frozen franchise in Paris. It is similarly adding a Frozen-inspired expansion in Hong Kong which is expected to be operational by the end of this year. In Shanghai Disney Resort also, the Zootopia-inspired expansion is expected to go live later this year.
The Parks segment is a key driver of Disney’s profitability and in the fiscal second quarter of 2023, it generated an operating profit of $2.16 billion on revenues of $7.78 billion while the Media and Entertainment Distribution segment posted an operating profit of $1.12 billion on revenues of $14.04 billion.
Why Disney Stock Looks Like a Good Buy Now
Meanwhile, Disney’s streaming losses have narrowed and the company expects the business to turn profitable in the next fiscal year. It has hiked Disney+ subscription prices in the US and has simultaneously launched an ad-supported tier.
The company is also looking to launch the ad-supported tier in Europe later this year. If Netflix’s experience is any indication, the ad-supported tier not only helps increase the subscriber count but also improves the overall average revenue per user (ARPU).
Iger believes that the company is on track to meet or exceed its target of cutting $5.5 billion in costs. The strategic actions to boost Disney’s earnings have analysts expecting the company's profits to rise 34.3% in the next fiscal year.
DIS Stock Forecast Looks Bullish
Disney has a consensus rating of “moderate buy” based on 22 analysts’ ratings. Its mean price target is $120.83, while the street-high target price of $150 implies an upside of almost 70% over current prices.
Not all analysts are bullish on Disney’s forecast though. Last week KeyBanc analyst Brandon Nispel downgraded the stock from an “overweight” to “equal weight” while emphasizing that he sees more negatives than positives for the stock. Nispel added, "We prefer to step aside, acknowledging meaningful uncertainty, and wait for further catalysts, as buying the dip has been a losing trade.”
There are also concerns over a possible US recession taking a toll on Disney’s earnings in the coming quarters.
However, I believe most of the negatives look priced in Disney stock as its next-12-month PE multiple of 20.7x is below the historical averages. As Disney’s streaming business moves towards sustainable profitability and the company’s cost-cutting efforts continue to take effect, the stock should rebound. Therefore, it's my opinion that the entertainment giant's stock is a good “buy the dip” candidate at current prices.
On the date of publication, Mohit Oberoi had a position in: DIS , QQQ , SPY . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
