Source: PaxForex Premium Analytics Portal, Fundamental Insight
Disney stock has fallen 39.5 percent over the past year as investors have failed to believe that the company will ever make a meaningful profit in the streaming business. But that may be a short-sighted view of Disney's performance this year.
Investors with a long-term perspective might look not at the quarter or YoY losses, but at the opportunities, Disney is trying to uncover in streaming. Here's a look at where the company could be in a few years, and why the market is underestimating its potential.
Disney's revenues from linear networks, which include traditional television networks such as ABC and ESPN, fell 5 percent over the year to $6.34 billion. Nevertheless, the company's operating profit rose 6 percent to $1.74 billion, suggesting that while the linear-network business may be in a slow decline, Disney has managed to maintain high profitability in this segment.
Linear TV is definitely declining, but its decline could be over a long period of time, perhaps even decades. For now, Disney can count on this business as a major source of cash flow. This is good news as the company builds a streaming business.
In the fiscal year 2021, Disney's Parks and Recreation revenues were up 73% from the previous year to $28.71 billion. This was accompanied by a significant increase in operating income, which rose from near break-even to $7.91 billion. This strong financial performance can be attributed to the full opening of most Disney resorts in the U.S., which have been extremely busy this year.
It is worth noting, however, that the COVID-19 pandemic is still negatively affecting Disney's parks and attractions business, especially in China, where Shanghai Disneyland has been subjected to strict quarantine restrictions. But you can see that even a year with moderate restrictions in operation can be extremely profitable for the park business.
Looking ahead, Disney's parks and entertainment business will likely continue to be a key source of cash flow for the company. No doubt, growth in 2021 won't repeat itself, but combined with linear television, the legacy business generates about $10 billion in operating income per year.
Where investors don't know what to anticipate is in streaming. But Disney is one of the few companies that will win in streaming, and it could be a very profitable business in the long run.
As of Oct. 1, 2022, Disney had 102.9 million paid Disney+ subscribers and another 61.3 million Disney+ Hotstar subscribers (an Indian offering with lower margins). ESPN+ adds another 24.3 million subscribers and Hulu adds 47.2 million. The problem is that this direct-to-consumer segment lost $4.0 billion on revenues of $19.6 billion as Disney spent billions on streaming content.
But there is some good news on the horizon. In the U.S., Disney recently increased the price of Disney+ from $8 a month to $11 a month for the ad-free version. There is now an ad-supported tier for $8 a month. That's a 38% price increase; just 102.9 million non-Hotstar subscriber customers will add $3.7 billion in revenue, almost nullifying the operating loss.
This is just the latest price increase for Disney. Remember, the streaming service was launched at just $4 a month in the U.S., and now it has risen to $11. As content is added, there will be further price increases and streaming margins will increase as a result.
If you can wait until streaming becomes profitable and the parks return to full operation, I think Disney would be a great company to own over the next several years. The company has a market value of $164 billion, and if net income returns to pre-pandemic levels of more than $10 billion, that would be an appropriate valuation.
When Bob Iger returned as CEO, he knew that raising prices at Disney+ would help profitability. He might be able to focus the company back on great content, working wonders at Disney for the second time.
As long as the price is below 97.00, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 86.83
- Take Profit 1: 85.00
- Take Profit 2: 80.00
Alternative scenario:
If the 97.00 level is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 97.00
- Take Profit 1: 101.00
- Take Profit 2: 107.00
