Disney (DIS -1.10%) unveiled its fiscal first-quarter earnings on Wednesday morning, and the market reaction was lukewarm at best. The stock saw a small uptick at the start but quickly dropped, remaining about 1% lower throughout much of the trading session.
Despite Disney’s numerous clear strengths, it’s been a tough ride on the stock market, with its performance remaining stagnant over the last ten years.
Some investors are feeling optimistic, thinking Disney may be on the right track after enduring several years of lackluster returns. The company’s streaming segment is now turning a profit, it holds complete ownership of Hulu, and there’s excitement building over the upcoming ESPN streaming service launch this fall.
Given its impressive lineup of assets and the recent success of Netflix in the streaming arena, Disney appears to hold significant upside potential in a market that might be larger than investors initially envisioned.
However, Disney needs to tackle three crucial challenges to ignite genuine growth confidence.
1. Expanding Its Streaming Audience
While Disney has managed to turn its streaming arm profitable, its growth story leaves much to be desired. In a quarter where Netflix gained nearly 20 million subscribers, Disney+ lost 700,000 users, while Hulu saw an increase of 1.6 million subscribers, resulting in a net gain of 900,000. Despite moderate subscriber growth, revenue from streaming increased due to price hikes.
Over the past year, Disney has added 13.3 million subscribers to Disney+ due largely to the new bundle with Hulu, which also saw an increase of 3.9 million subscribers.
Disney’s streaming strategy often seems unclear. In contrast, Netflix has long maintained a clear goal: to offer a wide array of video entertainment options catering to everyone.
With Disney’s diverse portfolio, the value proposition appears less straightforward. Complete ownership of Hulu provided a chance to streamline services, merging them to enhance customer experience, simplifying advertising and content programming. However, the current bundle arrangement feels awkward and unnecessary, a mistake that might be repeated with Fubo and Hulu + Live TV, which remain separate.
Adding ESPN streaming into the mix could further complicate the offering, with Disney potentially managing at least four distinct streaming services, bundled or otherwise.
While the recent drop in Disney subscribers could be temporary, consistent growth is essential for a segment expected to shape the company’s future.
2. Sustaining Box Office Dominance
Disney’s first-quarter report showed significant promise in its box office performance, flipping a $224 million loss in its content sales and licensing division to a $312 million profit, thanks in large part to successful releases like Moana 2 and Mufasa: The Lion King.
Big franchise movies like Moana are pivotal to Disney’s integrated business model. Their success not only boosts theme park attendance and merchandise sales but also fuels subscriptions for its streaming services.
The $71 billion acquisition of Fox’s entertainment assets in 2019 has yet to fully pay dividends for Disney. Capitalizing on popular intellectual properties and producing box office hits is the best way to enhance the return on that investment.
The leverage presented by theatrical releases is profound. A hit can generate substantial profits, while a flop results in losses. Though not every film will be a blockbuster, Disney should aim for consistent profitability in its content sales and licensing segment each quarter.
3. Maintaining Leadership in Sports
ESPN finds itself navigating a challenging landscape. Its once-dominant position in the cable industry has waned with the rise of streaming, facing competition from tech giants and traditional media companies alike.
The demand and price of sports content have surged, driven by the popularity of live sports and competition from well-funded tech companies.
The forthcoming launch of the ESPN flagship streaming service will be a significant litmus test for Disney. To pull in a large audience, the service not only needs to be profitable but also demonstrate tangible profit growth. Achieving this might require ESPN to reconnect with its roots, engaging viewers through studio shows like SportsCenter alongside live sports.
Disney’s future could lean heavily on ESPN’s success, as it has historically been a lucrative asset for the company. Its downturn has been a considerable factor behind Disney’s stock struggles over the past decade.
Answers won’t come overnight, as several quarters post-launch will be needed to gauge success. Yet, for CEO Bob Iger, who plans to retire next year, ensuring ESPN thrives is a critical priority.
Disney projects modest high-single-digit earnings-per-share growth this year, which isn’t exactly thrilling for investors. However, if the company performs well in key areas, there’s potential for profit growth far exceeding that marker. Disney still has the potential, but it’ll need to prove itself in these three areas to deliver the returns investors have been waiting for.
