Deutsche Bank Sees Attractive Opportunity for Walt Disney in H2/2023

Disney (NYSE:DIS) shares fell more than 1% intra-day today after Raymond James downgraded the company to Market Perform from Outperform, citing several challenges, particularly within the Parks division, that are likely to keep the stock in a range-bound pattern for the next 12 to 18 months.

Despite a recent 12% rebound in Disney’s stock, analysts are cautious about its near-term potential, noting that the company's Parks division faces slowing attendance and pricing power. Following a post-pandemic surge, demand has started to soften as consumers adjust to price increases implemented over the past four years.

Disney is also grappling with heightened competition, particularly with the upcoming launch of Universal's Epic Universe in Orlando next summer, which is expected to be a significant challenge in one of Disney's key markets.

Raymond James pointed to three specific issues impacting Disney’s parks: a diversion of attendance to the Paris Olympics, a typhoon temporarily closing Shanghai Disney, and a recent hurricane affecting Walt Disney World in Orlando. These disruptions have contributed to a more cautious outlook ahead of Disney’s fiscal fourth-quarter report.

The firm also acknowledged Disney’s strong position in the shift from linear TV to streaming, thanks to its ownership of two major streaming platforms and a leading intellectual property portfolio. However, they expressed concerns over the high costs involved in launching ESPN’s streaming service.

Additionally, while Disney's upcoming three new cruise ships, set to launch by the end of 2025, are expected to boost growth, Raymond James noted that the capital expenditures required will put pressure on the company’s free cash flow in the near term.

Seaport Global Securities analysts upgraded Walt Disney (NYSE:DIS) to Buy from Neutral, setting a price target of $108 on the stock.

The analysts acknowledged a shift in their outlook on Disney, citing improved macroeconomic conditions and better prospects for the company. They previously downgraded Disney shares over concerns about flat attendance at the Parks division and declining operating income. Additionally, increased spending on the company's direct-to-consumer (DTC) platform had led them to lower profitability estimates for fiscal year 2025.

However, the analysts now see a brighter future for Disney, driven by a more favorable macroeconomic environment. They believe market sentiment is more accepting of the current state of Disney’s Parks demand and DTC business, which is showing signs of emerging profitability.

Although Parks data remains somewhat weak, the analysts view it as a temporary issue, while DTC's recent price hikes and paid-sharing initiatives could help drive growth in both average revenue per user (ARPU) and subscriber numbers.

• Walt Disney Co. (NYSE:DIS) has achieved profitability in its streaming service, marking a significant milestone.
• The company's stock was downgraded to Neutral from Buy by Seaport Global, reflecting skepticism about Disney's short-term financial prospects.
• Despite a substantial increase in free cash flow, Disney's financial performance shows declines in key metrics such as revenue growth and net income growth.

Walt Disney Co. (NYSE:DIS) has recently reached a significant achievement as its streaming service begins to generate profit, marking a pivotal moment for the company. Despite this progress, a report from 24/7 Wall St. Insights has cast a shadow over this success by labeling Disney as "still an awful stock." This stark assessment underscores the hurdles Disney faces in its bid to reshape investor perceptions and affirm the value of its stock. The entertainment behemoth's journey to profitability in its streaming segment is a key development, yet it seems to struggle in fully swaying market sentiment in its favor.

The recent downgrade of Disney's stock by Seaport Global to Neutral from Buy, as reported by TheFly, adds another layer of complexity to Disney's financial narrative. This adjustment, announced on Thursday, August 8, 2024, with the stock priced at $85.96, reflects growing skepticism among analysts about Disney's immediate financial prospects. This downgrade is particularly noteworthy as it suggests a recalibration of expectations, possibly due to the challenges highlighted in the financial performance metrics of the company.

Disney's financial health, as indicated by its recent performance, presents a mixed picture. The company has seen a decline in revenue growth by approximately 6.23% in the latest quarter, alongside a slight decrease in gross profit growth by about 0.64%. More concerning is the dramatic drop in net income growth by 101.05%, signaling a significant hit to profitability. These figures, coupled with a decrease in operating income growth by roughly 2.37% and a fall in asset growth by about 1.35%, paint a challenging financial landscape for Disney.

However, not all indicators are negative. Disney has reported a substantial increase in free cash flow growth by 171.67% and an improvement in operating cash flow growth by approximately 67.78%. These positive developments in cash flow metrics suggest that, despite the downturns in other areas, Disney is generating more cash from its operations, which is crucial for sustaining investments and potentially improving its financial standing in the long run. Yet, the decline in book value per share growth by about 1.57% and a decrease in debt growth by roughly 2.92% further complicate the financial outlook, indicating a nuanced and multifaceted financial health that investors need to consider.

In summary, while Disney's streaming service turning profitable is a noteworthy achievement, the broader financial challenges and the recent downgrade by Seaport Global underscore the complexities in Disney's path to convincing investors of its stock's value. The mixed financial performance, characterized by significant growth in cash flow but declines in other key metrics, highlights the intricate balance Disney must navigate to enhance its stock appeal and secure investor confidence in its long-term prospects.

Walt Disney (NYSE:DIS) reported third-quarter earnings that exceeded analyst predictions, fueled by robust performance in its Entertainment segment. However, shares dropped over 4% intra-day today as the company cautioned about weakening demand in its Experiences segment.

Adding to the pressure on Disney's stock, it was reported that Disney and Comcast remain in a dispute over the valuation of Hulu. Disney indicated it might need to pay up to $5 billion more to acquire NBCUniversal’s 33% stake in the streaming service.

Disney reported adjusted earnings per share of $1.39, surpassing the Street estimate of $1.20. Revenue for the quarter was $23.2 billion, slightly above the consensus estimate of $23.08 billion and representing a 4% year-over-year increase.

The Entertainment segment was particularly strong, with operating income nearly tripling year-over-year, driven by better results in Direct-to Consumer and Content Sales/Licensing. Significantly, Disney achieved profitability across its combined streaming businesses for the first time, one quarter ahead of its previous guidance.

Despite the overall positive results, Disney warned of softening consumer demand in its Experiences segment, which may affect the upcoming quarters. The company expects Q4 operating income in the Experiences segment to decline by mid-single digits compared to the previous year.

Disney has now adjusted its full-year EPS growth target to 30%, citing strong consolidated financial performance in the third quarter.

• Michael Ng from Goldman Sachs has set a bullish price target of $125 for Disney, indicating a potential upside of approximately 22.57%.
• Despite facing challenges in its streaming and linear TV segments, Disney's theme park division has shown robust performance post-COVID-19.
• Disney's stock has begun to recover, fueled by better-than-expected Q2 fiscal year 2024 results and a surprising operating profit in its streaming operations.

On June 24, 2024, Michael Ng from Goldman Sachs set a bullish price target of $125 for Disney (NYSE:DIS), indicating a potential upside of approximately 22.57% from its price at the time of the announcement, which was $101.98. This optimistic outlook was shared alongside the initiation of coverage on Disney, as detailed in a report available on TheFly. The report, titled "Disney initiated with a Buy at Goldman Sachs," highlights the reasons behind Goldman Sachs' positive stance on the company. Disney, a global entertainment giant, has been navigating through a series of challenges and opportunities across its diverse business segments, including its streaming services, theme parks, and traditional linear TV operations.

Disney's stock, with the ticker symbol DIS, is currently trading at approximately $102 per share, which is nearly half of its peak price of around $202 observed on March 8, 2021. This significant drop in stock price has been attributed to a variety of factors impacting the company. Among these, Disney's streaming business has faced challenges such as slowing subscriber growth and increased competition from other streaming services. Additionally, the company's linear TV segment has experienced a downturn, marked by reduced advertising income and a fall in affiliate revenues within the domestic market. Despite these challenges, Disney's theme park division has shown robust performance since reopening post-COVID-19, although the near-term outlook presents a mix of higher expected costs and a potential normalization in visitor numbers.

However, there has been a positive development as Disney's stock saw a recovery from its low of about $80 in October 2023. This rebound was fueled by better-than-expected results for the second quarter of the fiscal year 2024 and a surprising operating profit reported in its streaming operations during the same period. Over a broader timeline, Disney's stock has experienced a sharp decline of 45% from its early January 2021 levels of $180 to around $100 currently. This overview suggests that while Disney faces several challenges across its various business segments, there are also signs of recovery and potential growth, particularly in its streaming business as it approaches profitability.

The Walt Disney Company (DIS), listed on the NYSE, is currently trading at $101.98, experiencing a slight decrease of $0.29, which translates to a change of approximately -0.28%. Today, the stock fluctuated between a low of $101.91 and a high of $103.08. Over the past year, Disney's shares have seen a high of $123.74 and a low of $78.73. The company's market capitalization stands at about $185.91 billion, with a trading volume of 7,349,654 shares. This financial snapshot, combined with the broader context of Disney's operational challenges and successes, underscores the rationale behind Goldman Sachs' bullish outlook on the company. Despite the hurdles, Disney's strategic moves, especially in its streaming and theme park divisions, hint at a resilient comeback, aligning with Goldman Sachs' optimistic price target.

Walt Disney (NYSE:DIS) announced fiscal second-quarter adjusted earnings per share of $1.21, surpassing Wall Street predictions. However, shares dropped more than 9% yesterday. Following a tough proxy battle earlier this year, Disney's executive team is focused on moving forward, with CEO Bob Iger at the helm of the company's turnaround efforts. Iger highlighted the success of these efforts, particularly noting a surprising operating profit of $47 million from its direct-to-consumer entertainment streaming service, which includes platforms like Disney+ and Hulu, alongside its vital parks business.

Disney raised its full-year earnings per share growth forecast to 25%, up from the previously projected 20%. While the direct-to-consumer segment may see softer results this quarter, Iger expects Disney's overall streaming business to achieve profitability by the fourth quarter, a key component of his strategy to improve the company's stock performance.

For this quarter, Disney reported a jump in group-wide revenues to $22.08 billion, up from $21.8 billion the previous year, and slightly below the consensus estimate of $22.1 billion.

InvestorPlace's comparison of Walt Disney (NYSE:DIS) to Blockbuster's failure to adapt highlights a critical concern for investors and market watchers. The entertainment giant's strategic decisions, particularly its heavy investment in streaming services and the acquisition of 21st Century Fox for a staggering $71.3 billion, are under scrutiny. This critique is rooted in the observation that Disney's pivot to streaming, despite its current lack of profitability, and the declining performance of its traditional cable and movie businesses, might not have been the most judicious use of its resources. The suggestion that Disney could have instead expanded its highly lucrative parks business internationally or entered the online sports betting market earlier through its ESPN brand, offers an alternative path that might have diversified its revenue streams more effectively.

The financial performance of Disney, as reflected in its recent stock price movement, provides a nuanced picture. The company's stock price saw a modest increase of 1.04, or 0.92%, to close at $113.66. This movement occurred within a trading day that saw the stock fluctuate between $112.80 and $114.11. Over the past year, Disney's stock has experienced a wide range, hitting a low of $78.73 and a high of $123.74. With a market capitalization of approximately $208.49 billion and a trading volume of 7.41 million shares, Disney remains a heavyweight in the entertainment industry. These figures suggest that despite the strategic concerns raised, the market still holds a considerable amount of confidence in Disney's overall value and potential for recovery.

The critique from InvestorPlace about Disney's strategic direction is particularly poignant when considering the broader context of the entertainment industry's evolution. The shift towards streaming services has been rapid and unforgiving to those who fail to adapt effectively. Disney's decision to double down on streaming, through both its investment in technology and content via the acquisition of 21st Century Fox, was a bold move. However, the critique suggests that this strategy may not be paying off as hoped, especially when compared to the potential of expanding its already successful parks business or leveraging its ESPN brand to enter the online sports betting market sooner.

The financial data, including the recent uptick in Disney's stock price and its substantial market capitalization, indicates that while there are strategic concerns, the company is far from a position of weakness. The stock's performance over the past year, with a significant range between its low and high points, reflects the volatility and uncertainty in the market. However, it also shows resilience and potential for growth. Disney's ability to navigate the changing landscape of entertainment consumption and competitive pressures will be crucial in determining whether its current strategic bets will pay off in the long run.

In summary, while InvestorPlace's critique of Disney's strategic decisions sheds light on potential missteps, the company's financial health, as evidenced by its stock performance and market capitalization, suggests a more complex picture. Disney's journey through the evolving entertainment landscape is a testament to the challenges and opportunities that come with trying to adapt to new consumer habits and technological advancements. The coming years will be telling in whether Disney's strategic focus on streaming and content acquisition will solidify its position as a leader in the entertainment industry or if alternative strategies might have offered a more effective path to sustained growth and profitability.