Is Disney a No-Brainer Buy? 3 Things It Still Has to Prove

Disney (DIS -1.10%) announced its fiscal first-quarter earnings on Wednesday, but the reaction from the market was quite subdued. The stock initially saw a slight increase but quickly fell, stabilizing at about 1% down for most of the trading day.

Despite having many clear competitive advantages, Disney's stock performance has been lackluster, essentially remaining flat over the past ten years.

Some investors remain hopeful that Disney might be on the verge of a turnaround after several years of disappointing returns. The reason for this optimism is that its streaming business has now become profitable, and Disney fully owns Hulu. Additionally, a flagship ESPN streaming service is set to launch in the fall.

There is potential for growth in Disney's stock, especially considering its diverse assets and the recent strong performance of industry leader Netflix, indicating that the streaming market could be larger than anticipated.

Nonetheless, there are three key areas Disney needs to improve on before it can be viewed as a solid investment.

1. Growth in Streaming Audience

Although Disney has achieved profitability in its streaming business, growth remains a challenge. While Netflix added nearly 20 million subscribers in the last quarter, Disney lost 700,000 on Disney+ but managed to gain 1.6 million on Hulu, resulting in a net gain of 900,000 subscribers. Even with a minimal growth in audience, revenue from streaming increased due to price hikes.

Over the past year, Disney+ experienced a more promising trend, gaining 13.3 million subscribers in total, although this may have been influenced by its new bundle offer with Hulu, which also saw a gain of 3.9 million subscribers.

The streaming strategy at Disney has often appeared confusing. In contrast, Netflix has consistently communicated its goal of providing a broad array of entertainment options.

Disney's multiple streaming services appear less clearly defined. Owning Hulu presents an opportunity for Disney to combine the two services, creating a smoother customer experience and simplifying advertising and programming efforts. The current bundle can feel cumbersome, and there is concern that Disney may mismanage its upcoming ESPN streaming service by keeping multiple platforms separate.

A recent drop in Disney's subscribers may be temporary, but consistent user growth is needed from a segment expected to drive the company's future revenues.

2. Maintaining Box Office Leadership

A positive highlight from Disney's first-quarter report was its box office performance. The company turned a loss of $224 million in its content sales and licensing sector into a profit of $312 million, largely driven by the success of Moana 2 and Mufasa: The Lion King.

Major franchise films like Moana are crucial to Disney's business model. Their success boosts not only box office revenues but also drives attendance at theme parks, sales of related merchandise, and subscriptions to streaming services.

Since acquiring Fox's entertainment assets for $71 billion in 2019, Disney has faced challenges in maximizing the value of that investment. Producing blockbuster movies from that content is vital for boosting returns.

Theatrical releases can wield significant profit potential—while there isn't a guarantee that every film will succeed, Disney should consistently be able to report profit from its content sales and licensing divisions.

3. Staying Competitive in Sports Broadcasting

The landscape for ESPN is evolving as the company's monopolistic grip on cable networks decreases in the streaming age. It now competes with technology giants as well as traditional media companies.

Moreover, the costs associated with sports programming are increasing due to high demand for live sports and competition from well-funded technology firms.

The upcoming launch of ESPN's flagship streaming service is a pivotal moment for the company. Disney needs to not only draw in a significant audience for the new ESPN platform but also ensure profitability and growth for the service. To achieve this, ESPN might consider reconnecting with its audience by increasing programming like SportsCenter alongside its live events.

Disney's future may rely heavily on the strength of ESPN, which has historically been a significant revenue generator for the company. The decline of ESPN's influence has contributed to Disney's stock struggles over recent years.

It will take several quarters post-launch to assess ESPN's success, which will be critical for CEO Bob Iger, who is slated to retire next year.

Disney's forward guidance includes a projected growth in earnings per share in the high single digits for the year, which is decent but not particularly exciting for investors. If the company can execute effectively across all its business areas, it could see faster profit growth. The potential certainly exists, but Disney must deliver results in these three critical areas to meet shareholder expectations.

Disney, Streaming, BoxOffice, Sports