Down 40% in this bear market, can Walt Disney bounce back in 2023?

What happened

Actions from Walt Disney (DIS 0.33%) are down by 39.8% since S&P 500 the market index peaked on January 3, 2022, according to S&P Global Market Intelligence. Let’s see why the titan of entertainment fell so hard last year and if the House of Mouse can recover from this painful price cut.

So what

Disney’s 2022 decline began in January. When the media stream rival Netflix (NFLX 3.59%) reported lackluster fourth-quarter results and hinted that its growing subscriber base could decline later in the year, with some investors noticing red flags for the media streaming sector as a whole. Disney shares fell 6.9% that day.

A follow-up Netflix report three months later did nothing to ease investor concerns about the overall health of the streaming industry, and its subscriber numbers actually fell short in the first quarter of 2022. Disney shares lost another 5.6% on the news.

Fast forward another three months to Netflix’s Q2 report. This time, the company lost nearly a million subscribers, but investors cheered as guidance suggested 2 million accounts were lost.

Moreover, management said that subscriber numbers should increase again in October’s third-quarter update. Disney investors have embraced the streaming rival’s signs of life, sending shares of the entertainment conglomerate up 8% in two days.

But that wasn’t the end of Disney’s troubles. Nov. 9 saw the biggest one-day price drop of the year, spurred by Disney’s fourth-quarter report. The company added 14.6 million net new streaming subscribers, with some overlap as many viewers subscribe to two or more of its Disney+, ESPN+ and Hulu services.

However, that big jump in subscribers came with expensive marketing and content spending, resulting in a $1.5 billion net operating loss for the direct-to-consumer division. Bob Chapek, Disney’s CEO at the time, promised to cut costs and increase profitability, but many investors are still hitting the sell button. Disney shares fell 13.7% that day.

Now what

As you can see, Disney’s investors are paying close attention to the company’s place in the video streaming industry, as well as the overall health of that sector. I’m here to talk about Disney’s disappointing year, but an accurate description requires focusing on Netflix for the most part.

That, of course, was not the whole story. The mutations of the corona virus have closed the theme parks for a while, dividend payments are still pending, some movies bombed at the box office, and Bob Iger took over the title of CEO from Bob Chapek in November. Still, the Netflix saga caused the sharpest price cut of the year (and one of the biggest jumps).

I expect these two stocks to remain closely correlated in 2023. Disney’s move from the silver screen to streaming comes with huge structural changes and full budget support, and the company needs to get it right.

On the other hand, Bob Iger is a proven winner who is likely to get Disney’s operations back on track. The next step is to figure out how it can grow its streaming business without burning too much cash in the process.

As a longtime shareholder of both Netflix and Disney, I’ve felt the pain of last year’s price movements, but I’ve also treated low stock prices as an opportunity to buy more stock. The two streaming giants are still dramatically undervalued in my eyes, so it’s not too late to pick up some Disney stock on the cheap today.

Anders Billund holds positions at Netflix and Walt Disney. The Motley Fool has positions and recommends Netflix and Walt Disney. The Motley Fool recommends the following options: long January $145 calls on Walt Disney and short $155 calls on Walt Disney in January 2024. The Motley Fool has a disclosure policy.

Source link

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button