Walt Disney Company (NYSE:DIS) is on the cusp of unveiling its fiscal Q3 earnings, scheduled for release on Wednesday, August 9. Despite the S&P 500’s double-digit ascent, Disney stock has fallen short in terms of price performance this year, remaining relatively flat throughout the period.
Taking a broader perspective, Disney’s underperformance extends beyond 2023. In fact, the current stock price hovers not far above its March 2020 lows—an era when global stock markets experienced a drastic crash in response to the emerging COVID-19 pandemic.
Last November, Disney replaced CEO Bob Chapek with his predecessor, Bob Iger, who has since undertaken multiple measures to reinvigorate the entertainment giant. Although DIS experienced an initial rally following Iger’s appointment, the stock has since retraced its gains. The impending fiscal Q3 earnings call marks the third report under Iger’s leadership, inviting attention to the ongoing business turnaround efforts.
Analysts Project Q3 Profit Decline for Disney
In fiscal Q3, analysts anticipate a 4.8% year-on-year revenue increase for Disney, reaching $22.5 billion. However, the company’s earnings per share (EPS) are expected to decline by 9.2% during this period.
While Amazon’s (NASDAQ:AMZN) Q2 earnings largely revolved around its enterprise-focused Amazon Web Services (AWS), Disney’s earnings report may shift the spotlight to the “S” word—streaming. Disney embarked on streaming in 2019 with the introduction of its Disney+ platform, which accumulated over 100 million users within the first 16 months of its launch. When accounting for Hulu and ESPN+, Disney now boasts a larger number of streaming subscribers than Netflix (NASDAQ:NFLX).
Yet, the relentless pursuit of streaming subscriber growth has exerted strain on Disney’s profitability. The segment incurred significant losses, peaking at $1.47 billion in the fiscal fourth quarter of 2022 (ending in September). Iger’s efforts to curtail these losses led to a reduction to $659 million in fiscal Q2, despite a decline of 4 million streaming subscribers during the quarter.
Anticipating Disney’s Q3 Earnings
In the upcoming earnings disclosure, market focus will likely center on both streaming subscriber figures and the segment’s profitability. This attention is particularly heightened given that rival Netflix gained 5.9 million subscribers in the June quarter, partly due to measures like password-sharing crackdowns and the introduction of an ad-supported tier.
In addition to the streaming division, investors will eagerly seek insights into Iger’s ongoing business transformation and cost-reduction endeavors. Iger previously hinted at a willingness to make tough decisions, including divesting linear TV assets that no longer align with Disney’s core focus.
Wall Street Analysts Remain Bullish on Disney Stock
Leading up to its quarterly results, Wall Street analysts maintain a bullish stance on Disney stock, with most rating it as a Strong Buy.
Among the 23 analysts covering DIS, 15 advocate a Strong Buy, while 2 suggest a Moderate Buy. Five analysts lean towards a Hold recommendation, and only 1 rate it as a Strong Sell. The average target price for Disney of $117 stands approximately 35% above the current stock level. Notably, the most optimistic projection of $150 represents a premium exceeding 73%.
Why DIS Appears Favorable Prior to Earnings
Disney, a globally iconic brand, offers something for every age group, rendering it a “cradle to grave” business. After experiencing a period of underperformance, the stock seems attractive at current levels for several reasons:
Narrowing Streaming Losses: Disney’s streaming losses are on a diminishing trajectory, and the company anticipates profitability in the next fiscal year. Recent U.S. price hikes for Disney+ subscriptions and the introduction of an ad-supported tier are poised to enhance financial performance. The ad-supported tiers are set to launch internationally later this year, commencing with Europe, likely bolstering subscriber counts.
Emphasis on Cost Reduction: Iger’s focus on cost-cutting could substantially benefit Disney’s earnings. Similar efforts have proven successful for companies like Amazon and Meta Platforms (NASDAQ:META), with the potential underestimation of Disney’s own cost-cutting endeavors.
Expanding Parks Segment: The expansion of international parks, such as the Frozen-themed attractions in Paris and Hong Kong, stands to bolster Disney’s most profitable segment—Parks. Enhancing the customer proposition in this domain bodes well for future profits.
Valuation and Streaming Profitability: Trading at a forward price-to-earnings multiple of 22.8x, Disney’s valuation is reasonable. As the streaming business heads towards profitability, the stock could experience significant valuation reevaluation.
Sentiment and Potential Upside: Market sentiment towards Disney is rather pessimistic ahead of the fiscal Q3 earnings report. With expectations set modestly, positive post-earnings price movement becomes more probable. Additionally, as the U.S. economy displays resilience, undervalued stocks like Disney might catch up with broader market trends in the coming months, even as the tech sector takes a breather.
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