Is Disney a No-Brainer Buy? Three Key Areas to Prove Its Value

Disney (DIS -1.10%) reported its fiscal first-quarter earnings recently, which did not excite the market. Initially, there was a slight increase in the stock price, but it quickly dropped and remained down about 1% throughout the trading session.

Despite having significant competitive advantages, Disney's stock performance has been lackluster, essentially flat over the past decade.

Some investors believe that Disney might finally be on the verge of recovery after a series of disappointing results. The streaming division has turned profitable, and the company now fully owns Hulu. Additionally, they are preparing to launch their primary ESPN streaming service later this year.

Given Disney's wealth of assets and the recent success of streaming competitor Netflix, which suggests that the streaming market could be larger than previously thought, there's certainly potential in Disney's stock.

However, there are three critical areas Disney needs to demonstrate improvement in before it can be confidently viewed as a growth stock.

1. Growing the Streaming Audience

Although Disney has achieved profitability in its streaming business, it still faces challenges with subscriber growth. In a quarter where Netflix added nearly 20 million new subscribers, Disney lost 700,000 on its Disney+ service. They did add 1.6 million subscribers to Hulu, resulting in a modest net gain of 900,000. Even with a price hike, overall subscriber growth remained stagnant.

Looking back over the last year, Disney did add 13.3 million subscribers to Disney+, in part thanks to the new bundle with Hulu. Hulu also saw an additional 3.9 million subscribers. However, Disney's streaming strategy appears somewhat unclear compared to Netflix, which has a well-defined goal of offering a diverse range of entertainment options.

With Disney now owning Hulu, there’s an opportunity to combine the services for a smoother customer experience rather than keeping them as separate entities. If they continue down the path of managing multiple streaming services, including the upcoming ESPN offering, the confusion could increase.

The recent decline in subscribers might just be a temporary issue, but consistent growth is essential for a division that is expected to be a big part of Disney's future.

2. Maintaining Box Office Success

One of the bright spots in Disney's first-quarter performance was its box office results. The company successfully turned a previous loss of $224 million in its content sales and licensing operations into a profit of $312 million, driven largely by hits like Moana 2 and Mufasa: The Lion King.

Producing successful films, particularly major franchise releases like Moana, is vital to Disney's overall business model. These blockbuster movies contribute to increased theme park attendance, merchandise sales, and subscriptions to their streaming platforms.

Disney's 2019 acquisition of Fox for $71 billion has yet to yield significant returns, and generating box office success from that deal is critical to justifying the expense. While not every film will be a hit, a consistent profit from content sales and licensing is necessary each quarter.

3. Maintaining Leadership in Sports

The sports industry is evolving, and ESPN must adapt to the new landscape. The company's previous dominance in cable TV is waning as it faces intensified competition from both tech giants and traditional media.

As the demand for live sports continues to rise, costs for sports content are also increasing, making it essential for Disney to navigate this challenging environment. The launch of the new ESPN streaming service will be a pivotal moment for the company; it must draw a substantial audience while being profitable and demonstrating growth.

In order to connect with viewers effectively, ESPN may need to revisit its roots, focusing on studio programming alongside live sports, much like its classic SportsCenter.

ESPN has traditionally been a significant cash generator for Disney, and its decline has significantly impacted the stock's performance over the past ten years. The true implications of ESPN's new launch won't be realized for several quarters, but CEO Bob Iger, who is set to retire next year, will view its success as a crucial goal.

Disney's guidance indicates a modest expectation of high-single-digit earnings per share growth in the coming year. While this projection may not inspire investor excitement, rapid profit growth could happen if the company successfully executes improvements across all areas mentioned. The potential remains, but to meet shareholder expectations, Disney must effectively address these three critical areas.

Disney, Streaming, BoxOffice