The media and entertainment landscape continues to evolve, and one company that has captured both the hearts of audiences and investors alike is The Walt Disney Company (NYSE: DIS). Disney, a powerhouse known for its iconic characters and franchises, recently released its third-quarter results for the fiscal year 2023.
The media giant waited until after the bell to deliver a mixed third-quarter performance, with the company’s topline of $22.33 billion missing Wall Street’s expectation of $22.497 billion, sending the share tumbling in post-market trading. While the bottom line of $1.03, which beat the street’s estimate of $0.956, is likely the catalyst for the share’s gap up pre-market as investors digest the quarter’s performance.
Technical
The picture below shows that Disney has underperformed in the S&P 500 (purple line) and Nasdaq 100 (orange line) year-to-date. Disney is up 0.7% year-to-date, while the S&P 500 is up 16.36%, and the Nasdaq 100 is up 22.78%. This underperformance is likely due to a number of factors, including the company’s recently disappointing third-quarter results and the ongoing decline in linear television viewership.
Source: FairMarkets Australia – Koyfin, Mfanafuthi Mhlongo
The price structure seen in the daily chart suggests that the price action has been under firm bearish pressure recently, with the price action firmly trading below the longer-term 200-EMA (orange line) and shorter-term 50-EMA (blue line), which could act as resistance to the price actions push higher. Thus, should the bearish momentum persist, the $85.05 and $79.92 support levels could serve as alluring anchor points for discerning investors seeking to ride out the storm and seize opportunities at a discount.
However, a push above the 50-EMA could suggest the prevalence of bullish momentum in the short-term, likely offering trading opportunities as the price action converges towards the discounted cash flow estimated fair value of $108.40 (green line). Therefore, the resistance level at $95.30 could entice a prudent investor for a potential 13.75% upside as the price action moves towards its estimated fair value.
Fundamental
In the third quarter of fiscal 2023, Disney reported a 4% increase in revenue, reaching $22.33 billion. While this figure slightly missed expectations of $22.497 billion, it’s important to consider the nuanced performance of various segments. The Media and Entertainment Distribution division saw a 1% year-on-year decline in sales, weighed down by linear networks and content sales licensing segments. In contrast, Parks, Experiences, and Products displayed a commendable 13% year-on-year growth, with both domestic operations and international markets showing impressive numbers. Adjusted per-share earnings, a crucial measure of profitability, stood at $1.03, surpassing the consensus estimate of $0.97.
The company’s Media and Entertainment segment saw revenue decline 1% year-on-year to $14.0 billion. The decline was driven by lower advertising revenue in the linear television business. The segment’s operating profit was $1.1 billion, down two percentage points year-on-year. The company’s Parks, Experiences and Products segment saw revenue rise 13% year-on-year to $8.3 billion. The increase was driven by the reopening of theme parks and the continued growth of the merchandise business. The segment’s operating profit was $2.4 billion, flat year-on-year. The company’s Direct-to-Consumer (DTC) segment saw revenue rise 9% year-on-year to $5.5 billion; however, it experienced an adjusted loss of $0.5 billion for the quarter.
Disney’s strategic emphasis on its streaming service, Disney+, also merits attention. Despite facing a 4% year-on-year decline in paid subscribers, Disney+ remains a major player in the streaming industry, with 146 million paid subscribers at the end of the third quarter. Netflix had 238 million subscribers, up 8% year-on-year. Disney+ Hotstar had 40 million subscribers, paying an average of $0.59/month. Disney+’s subscriber growth is slowing, but its average monthly revenue is increasing. This is likely due to the company’s focus on adding more premium content to its service. Netflix, on the other hand, is still adding subscribers, but its average monthly revenue is declining. This is likely due to the increasing competition from other streaming services.
From a financial perspective, Disney’s approach to pricing demonstrates the power of price elasticity. Despite the 4% year-on-year decrease in subscribers, the 13% year-on-year increase in average monthly revenue per subscriber suggests that Disney is positioned in a favourable part of the demand curve, where customers are willing to pay more for its unique offerings. Therefore the announced hike to the company’s ad-free plan from $10.99 to $13.99 is likely to provide a boost to the company’s revenue and a welcomed silver lining for Disney investors following the recent topline miss. Also, Disney’s average monthly revenue per subscriber experienced a noteworthy 13% year-on-year increase to $4.92, revealing the effectiveness of Disney’s pricing strategies and ability to drive higher revenue per user. Netflix, on the other hand, reported a marginal decrease in average monthly revenue to $11.45.
The picture below shows that Disney has showcased impressive financial strides over the past three years. In the third quarter of 2021, the company reported total revenue of $14.71 billion and a net income margin of -4.83%. In the second quarter of 2023, the company reported total revenue of $21.82 billion and a net income margin of 5.83%. This improvement is largely due to the success of the company’s direct-to-consumer (DTC) business, which includes Disney+, Hulu, and ESPN+. In the second quarter of 2023, the company’s DTC subscriber base grew to 220 million, an increase of 9% year-over-year.
The company’s free cash flow per share has also improved significantly, from $0.52 in the third quarter of 2021 to $1.09 in the second quarter of 2023. This improvement is due to the company’s strong operating cash flow, which was $5.1 billion in the second quarter of 2023. Overall, the company’s financial metrics have improved significantly over the past years, leaving the company well-positioned for continued growth in the years to come.
Source: FairMarkets Australia – Koyfin, Mfanafuthi Mhlongo
The picture below shows that Disney’s share total return of -32.66% in the past five years has been a mixed bag, lagging behind Comcast’s 13.60%, Sony’s 5.99%, Netflix’s -13.31% but hovering around the same return as Warner Bros. (-32.75%) and Paramount (-34.65%). Disney’s P/E ratio is also higher than its peers, at 38.9x compared to Comcast (29.9x), Warner Bros. (8.3x), Sony (17.2x), and Paramount (22.5x).
There are a few reasons for Disney’s underperformance. First, the company has been facing challenges in its traditional media business, as advertising revenue has declined and subscribers to its cable networks have fallen. Second, Disney has been investing heavily in its DTC business, which is still in the early stages of growth. This has weighed on the company’s profitability.
However, there are also some reasons to be optimistic about Disney’s future. The company has a strong brand and a loyal customer base. It is also investing heavily in its DTC business, which is growing rapidly. In addition, Disney is expanding its international footprint, which should help to drive growth in the years to come.
Source: FairMarkets Australia – Koyfin, Mfanafuthi Mhlongo
As the entertainment industry continues to evolve, Disney’s strategic pivots and emphasis on its streaming service signal a promising trajectory. The company’s efforts to restructure and improve efficiencies, as highlighted by CEO Bob Iger, are yielding results and setting the stage for future growth. It’s essential to recognise the cyclicality of business and acknowledge that short-term fluctuations in subscribers may not necessarily indicate long-term challenges.
Summary
Disney presents an intriguing investment opportunity with its strong market position and growth potential in favoured segments and regions. While Disney has shown modest improvements in its operating income, careful investors may prefer to wait for higher levels of net income margin before making any significant investment decisions.
As the market digests the recently released earnings, it is essential to closely monitor the company’s ability to meet or exceed guidance and evaluate the impact on its valuation.
Sources: Financial Times, TradingView, KoyFin, Seeking Alpha, Reuters, MT Newswires, Dow Jones Newswire, The Disney Company.