Tired Walt Disney(NYSE: DIS) shareholders were the recipients of some positive news last week when the company provided a positive update about its business. But the stock is still underwhelming, up only 27% over the past 10 years. That's staggering underperformance for a Dow 30 stock, and might make you think twice before deciding that the company is a worthwhile investment.
Let's see what all the fuss is about and whether or not you can entrust your hard-earned money in a stock that has been a disappointment for too long.
Not meeting today's moment
Media and content consumption has shifted dramatically over the past five or so years. Disney was gearing up for a streaming takeover when it acquired part of Hulu and launched Disney+ in 2019. What it wasn't prepared for, though, was how the entire media landscape would shift when the pandemic started.
To be fair, all legacy media companies have been struggling since then, not just Disney. Even Netflix, not at all legacy, has been going through its own reckoning.
Disney has done an admirable job rolling out its streaming networks, filling them with content, and upgrading its parks. The main factor impeding its progress has been the profitability (or lack thereof) of its streaming efforts. Management has promised for several years now that it would be profitable by the end of 2024, and with the release of the 2024 fiscal fourth-quarter earnings results last week, it has come through on that promise.
It was an excellent quarter all around. Revenue increased 6% year over year, and Disney+ Core paid subscriptions increased by 4.4 million to 120 million. It had two smash summer hits with Pixar Studio's Inside Out 2 and Marvel Studio's Deadpool & Wolverine, and the parks segment inched up 1%, as well.
The big success, though, was positive operating income of $253 million in the entertainment streaming business. That excludes sports streaming, and total streaming operating income was $321 million. That came from higher paid subscriptions, as well as a 14% increase in advertising for the ad-supported tier, and led to operating income of $1.1 billion for the entertainment segment, up from $236 million last year, even though linear networks continue to decline.
Overall, operating income increased 23% year over year and earnings per share (EPS) were up from $0.14 last year to $0.25 this year.
It's all about the profits
It's somewhat surprising how battered Disney stock has become, considering the company's dominance in its field. The name Disney is synonymous with entertainment and is still the leader in media, films, and parks.
What you'll notice in the chart below is that sales have completely rebounded from pandemic lows and have far exceeded levels from a decade ago, whereas net income is still below what it was 10 years ago. The stock price is pretty much smack in the middle after a surge in 2020-2021.
Note that the net income levels have been seriously hurt by the streaming efforts, and it becomes very clear why the market has placed such a premium on Disney getting its streaming act together. In the chart, the change is negative, but Disney has reported positive net income for several quarters now. It's going to take time to surpass previous highs, though, even if the business trends continue to be positive.
Taking a chance on the industry leader
In general, it's good to have some funds invested in reliable industry leaders. But Disney hasn't been so reliable lately, has it? When times change, the biggest companies can become dinosaurs and be at risk of failure.
It doesn't look like Disney fits that template nowadays. It's at the forefront of media trends, and its creatives are a machine for new content. Yet, the stock has been a weak performer in recent years.
There are still risks ahead. Bob Iger was called back as a savior, but the company is on the lookout -- again -- for someone who can lead the company into its next phase successfully. Profits are still lagging what the market wants to see.
At the current price, Disney trades at only 19 times forward-one-year earnings. That could be a steal, but the low ratio also tells you how wary the market is.
There's reason for confidence and reason for caution. Investors may want to take a small position on the chance of Disney's rebound.
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Jennifer Saibil has positions in Walt Disney. The Motley Fool has positions in and recommends Netflix and Walt Disney. The Motley Fool has a disclosure policy.
