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Here's How to Play Disney (DIS) Post Q3 Streaming Profitability
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Disney (DIS - Free Report) achieved a major milestone in its pivot toward the streaming era. The company’s streaming services segment turned profitable for the first time in the third quarter of fiscal 2024, ahead of its prior expectations of achieving profitability in the fourth quarter. This is a significant development that has sent shockwaves through the media industry and has investors questioning whether now is the time to buy Disney's stock. (Read More: Disney Q3 Earnings Beat Estimates, Revenues Rise Y/Y)
Disney's streaming operations, which include the flagship Disney+ service as well as Hulu and ESPN+, have been a major focus area for the company in recent years as it seeks to transform its business model and compete with the likes of Netflix (NFLX - Free Report) , Amazon (AMZN - Free Report) -owned Amazon Prime Video and Apple (AAPL - Free Report) owned Apple TV+.
In the fiscal third quarter, Disney's direct-to-consumer (DTC) segment, which houses Disney's streaming services, recorded $47 million in operating income on 15% revenue growth. Disney+ subscribers rose to 153.8 million, while the number of Hulu subscribers increased to 51.1 million. Total entertainment revenues climbed 4% to $10.58 billion, driven by DTC streaming growth.
As investors turn their attention to the latter half of the year, the entertainment giant's stock presents both opportunities and challenges that warrant careful consideration.
Disney Navigates Streaming Landscape With Price Hikes, Sports Deals
In a strategic move to bolster its streaming dominance, Disney announced plans to raise subscription prices across its various platforms, including Disney+, Hulu, and ESPN+. Effective Oct 17, the price of the basic Disney+ plan will increase by $2 to $9.99 per month, while the ad-free version will rise to $15.99 per month. Hulu's ad-supported plan will also see a $2 increase to $9.99 per month, and the ad-free version will cost $18.99 monthly.
Alongside these price hikes, Disney has also secured an 11-year media rights extension with the National Basketball Association (NBA) and the Women's National Basketball Association, valued at around $77 billion. This deal will allow ESPN to continue as the exclusive home of the NBA Finals. The full package of NBA and WNBA events and programming will be available on ESPN's upcoming direct-to-consumer platform, set for launch in fall 2025.
Amid these developments, Disney is also enjoying its first box-office success for the Marvel Cinematic Universe in years, providing a much-needed boost to its traditional media and entertainment segments. This, coupled with the company's focus on streaming profitability, suggests that Disney is navigating the evolving media landscape with a multi-pronged approach.
The company remains on track for the profitability of the combined streaming businesses to improve in the fourth quarter of fiscal 2024, with both Entertainment DTC and ESPN+ expected to be profitable in the quarter.
The Zacks Consensus Estimate for fiscal 2024 revenues is currently pegged at $91.15 billion, indicating 2.5% year-over-year growth. The consensus mark for fiscal 2024 earnings has moved north by 0.6% to $4.78 per share over the past 30 days, indicating 27.1% growth from the year-ago period.
Image Source: Zacks Investment Research
Streaming Rivalry and Financial Pressure Cloud Disney's Outlook
Disney's anticipated modest growth in Disney+ Core subscribers in the fiscal fourth quarter reflects the intensifying competition and subscriber fatigue in the streaming space. The initial surge in Disney+ subscriptions has given way to a more challenging phase, as evidenced by the contrasting performance of rivals like Amazon and Netflix, which continue to see robust subscription growth.
Shares of Disney have declined 5.1% year to date compared with the broader Zacks Consumer Discretionary sector’s decline of 6.6%.
Year-to-date Performance
Image Source: Zacks Investment Research
Besides, Warner Bros. recently filed a breach-of-contract suit against the NBA, claiming the league violated its media-rights agreement with its TNT network. This added a layer of complexity to Disney's sports broadcasting strategy.
The shifting landscape of content consumption has also raised concerns about the future of traditional movie-going experiences, as evidenced by the 4.4% decline in Content Sales/Licensing and Other revenues in the third quarter of fiscal 2024.
Additionally, the company's substantial borrowings of $47.5 billion, coupled with a limited cash position of $5.95 billion, pose financial challenges.
Disney is trading at a premium with a trailing 12-month P/S of 1.75X compared with the Zacks Media Conglomerates industry’s 0.9X, reflecting a stretched valuation.
DIS’s P/S TTM Ratio Depicts Stretched Valuation
Image Source: Zacks Investment Research
Conclusion
For those considering how to play Disney stock in the second half of 2024, a nuanced approach is warranted. As Disney continues to reshape its business model, investors will closely monitor the company's ability to strike the right balance between streaming profitability, traditional media success and navigating the ever-changing competitive landscape. The coming quarters will be crucial in determining whether Disney's strategic moves, including the recent price hikes and sports media deals, will pay off in the long run.
Risk-averse investors or those with a shorter investment horizon may want to exercise caution and wait for a better entry point, given the uncertainties surrounding the company's growth prospects and the competitive pressure it faces despite the enduring power of the Disney brand.
Image: Shutterstock
Here's How to Play Disney (DIS) Post Q3 Streaming Profitability
Disney (DIS - Free Report) achieved a major milestone in its pivot toward the streaming era. The company’s streaming services segment turned profitable for the first time in the third quarter of fiscal 2024, ahead of its prior expectations of achieving profitability in the fourth quarter. This is a significant development that has sent shockwaves through the media industry and has investors questioning whether now is the time to buy Disney's stock. (Read More: Disney Q3 Earnings Beat Estimates, Revenues Rise Y/Y)
Disney's streaming operations, which include the flagship Disney+ service as well as Hulu and ESPN+, have been a major focus area for the company in recent years as it seeks to transform its business model and compete with the likes of Netflix (NFLX - Free Report) , Amazon (AMZN - Free Report) -owned Amazon Prime Video and Apple (AAPL - Free Report) owned Apple TV+.
In the fiscal third quarter, Disney's direct-to-consumer (DTC) segment, which houses Disney's streaming services, recorded $47 million in operating income on 15% revenue growth. Disney+ subscribers rose to 153.8 million, while the number of Hulu subscribers increased to 51.1 million. Total entertainment revenues climbed 4% to $10.58 billion, driven by DTC streaming growth.
As investors turn their attention to the latter half of the year, the entertainment giant's stock presents both opportunities and challenges that warrant careful consideration.
Disney Navigates Streaming Landscape With Price Hikes, Sports Deals
In a strategic move to bolster its streaming dominance, Disney announced plans to raise subscription prices across its various platforms, including Disney+, Hulu, and ESPN+. Effective Oct 17, the price of the basic Disney+ plan will increase by $2 to $9.99 per month, while the ad-free version will rise to $15.99 per month. Hulu's ad-supported plan will also see a $2 increase to $9.99 per month, and the ad-free version will cost $18.99 monthly.
Alongside these price hikes, Disney has also secured an 11-year media rights extension with the National Basketball Association (NBA) and the Women's National Basketball Association, valued at around $77 billion. This deal will allow ESPN to continue as the exclusive home of the NBA Finals. The full package of NBA and WNBA events and programming will be available on ESPN's upcoming direct-to-consumer platform, set for launch in fall 2025.
Amid these developments, Disney is also enjoying its first box-office success for the Marvel Cinematic Universe in years, providing a much-needed boost to its traditional media and entertainment segments. This, coupled with the company's focus on streaming profitability, suggests that Disney is navigating the evolving media landscape with a multi-pronged approach.
The company remains on track for the profitability of the combined streaming businesses to improve in the fourth quarter of fiscal 2024, with both Entertainment DTC and ESPN+ expected to be profitable in the quarter.
The Zacks Consensus Estimate for fiscal 2024 revenues is currently pegged at $91.15 billion, indicating 2.5% year-over-year growth. The consensus mark for fiscal 2024 earnings has moved north by 0.6% to $4.78 per share over the past 30 days, indicating 27.1% growth from the year-ago period.
Image Source: Zacks Investment Research
Streaming Rivalry and Financial Pressure Cloud Disney's Outlook
Disney's anticipated modest growth in Disney+ Core subscribers in the fiscal fourth quarter reflects the intensifying competition and subscriber fatigue in the streaming space. The initial surge in Disney+ subscriptions has given way to a more challenging phase, as evidenced by the contrasting performance of rivals like Amazon and Netflix, which continue to see robust subscription growth.
Shares of Disney have declined 5.1% year to date compared with the broader Zacks Consumer Discretionary sector’s decline of 6.6%.
Year-to-date Performance
Image Source: Zacks Investment Research
Besides, Warner Bros. recently filed a breach-of-contract suit against the NBA, claiming the league violated its media-rights agreement with its TNT network. This added a layer of complexity to Disney's sports broadcasting strategy.
The shifting landscape of content consumption has also raised concerns about the future of traditional movie-going experiences, as evidenced by the 4.4% decline in Content Sales/Licensing and Other revenues in the third quarter of fiscal 2024.
Additionally, the company's substantial borrowings of $47.5 billion, coupled with a limited cash position of $5.95 billion, pose financial challenges.
Disney is trading at a premium with a trailing 12-month P/S of 1.75X compared with the Zacks Media Conglomerates industry’s 0.9X, reflecting a stretched valuation.
DIS’s P/S TTM Ratio Depicts Stretched Valuation
Image Source: Zacks Investment Research
Conclusion
For those considering how to play Disney stock in the second half of 2024, a nuanced approach is warranted. As Disney continues to reshape its business model, investors will closely monitor the company's ability to strike the right balance between streaming profitability, traditional media success and navigating the ever-changing competitive landscape. The coming quarters will be crucial in determining whether Disney's strategic moves, including the recent price hikes and sports media deals, will pay off in the long run.
Risk-averse investors or those with a shorter investment horizon may want to exercise caution and wait for a better entry point, given the uncertainties surrounding the company's growth prospects and the competitive pressure it faces despite the enduring power of the Disney brand.
Disney currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.