Walt Disney – An Investor's Dream with a Bitter Aftertaste

The earnings season is in full swing, and one of the most anticipated financial reports came from Walt Disney. The company exceeded both revenue and profit expectations, yet the stock fell by about four percent on the day of the announcement. This weakness continues a downward trend for the well-known media and entertainment stock, which is down a staggering 57 percent from its peak in March 2021. However, before investors jump on this price decline, they should consider both the optimistic and pessimistic arguments for Disney. Disney shines with some compelling points that investors will appreciate. First, Disney possesses one of the most extensive economic moats, supported by unparalleled intellectual property rights. From Pixar and Marvel to Lucasfilm and Disney Animation, no other company has comparable content that has kept Disney relevant for decades. This extensive portfolio of intellectual property also allows Disney to generate revenue in multiple ways. The so-called "flywheel" enables multilateral revenue streams through box office returns, linear networks, streaming platforms, theme parks, and consumer product sales. Despite the devastating impact of the COVID-19 pandemic on Disney's experiences segment, which includes popular theme parks and cruise lines, this business sector has made a strong comeback. In the third quarter of the current fiscal year, revenue and earnings before interest and taxes (EBIT) increased by 28 percent and 29 percent, respectively, compared to the same period in 2019. Another highlight was the operating profit of Disney's combined streaming services, including Disney+, Hulu, and ESPN+, in the third quarter. Management had originally hoped to achieve this by the fourth quarter. This profit could mark the beginning of a longer-term income increase for this business segment, which has historically consumed billions in cash flow. On the other hand, there are significant drawbacks that cannot be ignored. One of the most prominent is the delayed launch of Disney+. Although the current CEO, who also led the company from 2005 to 2020, is considered one of the best executives in recent times, he might have missed the timely launch of the streaming service — a full twelve years after Netflix. Additionally, it is argued that the direct-to-consumer (DTC) segment may never reach the profit potential of the once-thriving linear networks like ABC and ESPN, which are suffering from the trend of cable-cutting. These networks used to generate substantial margin returns, and it is doubtful that the DTC activities can achieve the impressive 30 percent operating margin seen in 2010. Although the theme parks are on the rise again, this segment shows signs of cooling, with only two percent revenue growth in the last quarter. Should a recession occur, Disney's experiences sector will undoubtedly suffer, especially if consumer spending declines. So, is it worth buying the stock? The optimistic arguments outweigh the negative ones. Although many uncertainties remain, the massive price decline seems to be a market overreaction that patient investors could be rewarded for over the next three to five years as the fundamentals improve.