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With a YTD gain of just over 6%, Walt Disney Company (DIS) stock is underperforming the S&P 500 Index ($SPX) by a fairly wide margin. The entertainment giant’s underperformance has been a long-term phenomenon, and it has lost 18% over the last five years.
Stretching back even further, Disney shares are up 31% over the last 10 years - which is only about one-fifth of the returns delivered by the SPDR S&P 500 ETF (SPY) over the same period. That’s not the kind of performance that investors would generally associate with a company like Disney, which is among the most iconic global brands and is the proverbial “cradle to grave” business – offering something to every age group.
As 2023 draws to a close and investors begin to position their portfolios for 2024, it's worth analyzing whether Disney stock can recover in the next year after over a decade of perennial underperformance. Let’s begin by analyzing the reasons behind the stock’s underperformance.
Why Is Disney Stock Falling?
A cursory look at Disney’s earnings might tell us why the stock recently fell to its lowest levels since 2014. The company generated an operating profit of $10.7 billion in fiscal year 2013, which rose to all of $12.8 billion by the most recent fiscal year. The metric peaked at $15.7 billion in fiscal year 2018 - and although profit has risen from the COVID-19 lows, it has shown anemic growth over the last decade, and so have Disney shares.
Disney has changed its reporting structure a couple of times over the last decade, so we don’t exactly have an apples-to-apples comparison. However, while the profitability of its theme parks (now part of the Experiences segment) has risen over the years, the contribution from the erstwhile Media Networks – which accounted for over 63% of its fiscal year 2013 operating income – has fallen drastically. For instance, in fiscal year 2023, the combined Entertainment and Sports segment posted an operating income of $3.9 billion, which is $2.7 billion lower than what the Media Networks segment posted in fiscal year 2013.
The fortunes of cable TV have declined with the advent of streaming, which has taken a toll on Disney’s profits. The company did pivot to streaming with the launch of Disney+ in 2019, and the service reached 100 million subscribers in just 16 months, but the business is still posting losses. The segment's results are now reported with the Entertainment segment.
Disney’s Releases, Including ‘Wish,’ Have Underperformed
Many of Disney’s recent releases, including “Wish” and “The Marvels” from the popular Marvels franchise, have tanked at the box office. Disney also replaced its CEO Bob Chapek with his predecessor Bob Iger a year back, and while Iger has taken several actions to revive the company, the stock has continued to sag even under his leadership.
Will Disney Stock Recover in 2024?
Disney stock should recover in 2024, as Iger’s plans to turn around the company start to reflecting in its bottom line. While admitting that some of the company’s theatrical releases have not lived up to the high bar that Disney has set, Iger has also made it clear that, going forward, the company will prioritize quality over quantity.
At the employee town hall marking his first anniversary as the CEO, Iger acknowledged, “When it comes to creating a perception of the company, nothing is more powerful than movies” – adding that it also impacts perception among investors. Alluding to his tenure as the CEO, he said, “I feel that we’ve just emerged from a period of a lot of fixing to one of building again.”
Iger previously reiterated that Disney’s streaming business is on track to reach breakeven by the end of this fiscal year. The company has further expanded the scope of cost cuts, and said that it is targeting structural cost savings of $7.5 billion – $2 billion higher than the previous forecast. These cost cuts should help improve Disney’s earnings in the coming quarters, and markets should also eventually appreciate their impact.
The company is also looking to launch a direct-to-consumer platform for ESPN by 2025, and has already launched the sports-gambling platform ESPN Bet in collaboration with Penn Entertainment (PENN), which could be another growth driver.
Disney is also doubling down on its hugely profitable parks, and has committed to invest $60 billion in the business over the next decade. These investments should help address some of the concerns about service and wait times that many visitors have flagged over the last couple of years.
Disney’s “Magic” Might Return Sooner Than Later
Overall, I believe Disney's “magic” might return sooner rather than later as the company works towards profitable growth and addresses the multiple issues that have plagued it over the last couple of years.
The stock trades at a next 12 months (NTM) price-to-earnings multiple of just under 21x, which looks reasonable. If the company can deliver on projected cost cuts and streaming profitability, and even manage a few box office hits surpassing $1 billion – something Disney releases did with ease in the past – the market’s perception of the company should change, and the stock will eventually recover.
On the date of publication, Mohit Oberoi had a position in: DIS , SPY . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
