It's hard to find a company with more evident competitive advantages yet has performed worse on the stock market over the last decade than Walt Disney (NYSE: DIS).
The entertainment giant has been a household name for nearly a century, and it's been a leader in family entertainment ever since the release of Snow White, its first animated feature film in 1937. Today, its empire spans ESPN, the properties it gained from the Fox acquisition including Hulu and Hotstar in India, six theme parks around the world that have defined the category, a cruise and vacation business, a large consumer products business that licenses its intellectual property for toys, clothes, and other products, and of course, its core TV and movie business, including ABC, Disney+ and other streaming platforms.
Despite that evident strength, the stock has floundered over the last decade due to the broader upheaval in the video entertainment industry. The transition to streaming has crushed the traditional linear media ecosystem dependent on box office revenue and cable subscriber and advertising fees. Operating income started slipping in 2019 and collapsed during the pandemic, and it has still not recovered to its pre-pandemic peak.
However, the company showed signs of turning the corner in its fiscal fourth-quarter earnings report, which ended on Sept. 28. The stock jumped as much as 12% on the news. Let's take a look at three of the catalysts that could finally make the stock a long-term winner.
Image source: Disney.
1. The bleeding from linear media is basically done
Like its legacy media peers, Disney has struggled to transition from linear media to streaming. Cable revenue has collapsed due to cord-cutting and the company lost much of its ad revenue as well. However, the fourth-quarter numbers were notable because the bottom-line gains from streaming outpaced the losses from linear media.
In its direct-to-consumer segment, which is made up of the non-sports streaming platforms, the company reported a profit of $253 million, compared to a loss of $420 million in the quarter a year ago. Operating income at linear networks fell from $805 million to $498 million, meaning the company has nearly passed the torch from linear to streaming as far as profits are concerned.
Overall operating income in the entertainment segment jumped during the fiscal year, but that was primarily because the company erased deep losses in the direct-to-consumer segment. Now, the company finally seems ready to move forward with a DTC-first strategy, growing overall entertainment profits.
Advertising revenue also increased as Disney grows its ad impressions, and the company seems to be following in the path forged by Netflix, whose ad tier has already attracted 70 million subscribers since it launched two years ago.
2. The parks business keeps getting stronger
While Disney's core entertainment business is flailing, it continues to invest in the theme park business, which is expected to continue to grow over the coming years.
In the fourth quarter, weakness in the international segment overshadowed strength in the domestic business and operating income fell 6% in the quarter to $1.66 billion, though it still rose 4% for the full year to $9.3 billion.
Management expects continued growth next year, calling for 6%-8% growth in operating income from the segment, weighted toward the back half of the year. Meanwhile, the company continues to invest in the business with the Disney Treasure cruise ship set to be unveiled next week, and seven additional ships under development.
While results in the parks business will be choppy, it should grow steadily, especially as the company adds new ships and new experiences at the theme parks.
3. ESPN flagship steaming could be a big winner
Disney is finally putting its flagship ESPN network on streaming next fall, and it should help bridge the gap between linear and streaming media.
ESPN has long been the company's most valuable television property, and it's beefed up its sports rights ahead of the launch. CEO Bob Iger also teased some potential innovations from a streaming app, including having an AI-driven personalized SportsCenter with a customized sports experience. In other words, the product has the potential to be the best sports entertainment experience ever made.
Iger also noted that live television, especially live sports is "extremely attractive" to investors and those relationships should help make the ESPN flagship app a winner as well.
Altogether, Disney finally seems to be emerging from its yearslong transition to streaming with profits in DTC, a growing subscriber base, strong ad adoption, a booming parks and experiences business, and excitement likely to build around the launch of the ESPN flagship app.
Management guided to high-single-digit EPS growth next year, pleasing investors, and margins should continue to expand as its streaming business scales up. Disney finally seems ready to put a lost decade behind it.
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Jeremy Bowman has positions in Netflix and Walt Disney. The Motley Fool has positions in and recommends Netflix and Walt Disney. The Motley Fool has a disclosure policy.
