Despite Disney reporting mixed second-quarter results for fiscal 2024, the pullback in its shares is seen as an overreaction. Revenue for the quarter was nearly flat year over year at $22.08 billion, slightly below analyst estimates, while adjusted earnings per share increased by 30% to $1.21, surpassing expectations. Disney is valued for its strong Parks business and cost-cutting efforts, which are expected to lead to expanded profit margins. The company is focused on streamlining its direct-to-consumer offerings and finding new ways to monetize its content portfolio and ESPN.
Competitors such as Comcast, Netflix, Warner Bros Discovery, and Paramount Global are keeping Disney on its toes, but the company remains on the right track. Despite the stock declining by 10% post-earnings, the results and guidance were not as negative as reflected in the market reaction. Disney’s cost-reduction efforts are progressing well, and the direct-to-consumer streaming business is expected to achieve profitability by the end of the fiscal year. Management is also actively repurchasing shares, indicating confidence in the company’s future prospects.
The recent decline in Disney’s stock price is viewed as excessive, especially in light of the upward revision to earnings guidance and the reaffirmation of sustained profitability for the direct-to-consumer business. While there may be short-term challenges, such as steeper losses in the current quarter, a rebound is expected in the next quarter. The overall outlook remains positive, with management aiming for continued profitability and cost reductions. Investors are encouraged to see the company’s focus on returning capital to shareholders through buybacks.
Comparisons are drawn to Netflix’s post-earnings stock reaction, which also saw a temporary drop before recovering. Disney’s streaming platform is expected to be a key player in the market, especially as consumers look to consolidate their streaming subscriptions. The company’s combined direct-to-consumer business is forecasted to become profitable by the end of fiscal 2024. Disney’s Experiences division, which includes theme parks and cruises, is expected to see short-term profit pressures but is set for a rebound in the fourth quarter.
Despite some challenges in the Entertainment segment, the direct-to-consumer part showed promising results with better-than-expected sales and a surprise profit from Disney+ and Hulu. The company is focused on increasing engagement, reducing distribution costs, and enhancing programming to drive profitability in this segment. The Sports division, particularly ESPN, is still working towards profitability but shows potential for growth as they execute their streaming strategy. The Experiences segment faced margin pressure, but the company is optimistic about the rebound in profitability, especially in the theme park and cruise line businesses.
Looking ahead, Disney remains focused on achieving profitability in its direct-to-consumer business and expects to generate over $8 billion in free cash flow in fiscal 2024. The company’s cost-cutting efforts and revenue growth initiatives are expected to drive future earnings growth. Despite short-term challenges, such as weak streaming performance in India and margin pressure in the Experiences segment, Disney is navigating through these issues and remains on track to achieve its long-term goals. Overall, the recent pullback in Disney shares is viewed as a buying opportunity for investors who believe in the company’s growth potential.
