Disney’s (NYSE: DIS) earnings are always among the most eagerly awaited each quarter and in many ways, can act as a bellwether for the broader economy. On the one hand, their Parks business gives investors a certain type of pulse on consumer sentiment and discretionary spending, while their Streaming unit gives a more nuanced touch point.
Unfortunately, the headline fiscal Q4 numbers, which were released after yesterday’s session, didn’t bode particularly well for either. Revenue for the quarter was only up 9% on the year and well below the consensus that was looking for 16% growth, while EPS also missed the mark by some distance. Analysts had expected it to come in around $0.56 for the non-GAAP print, but it was almost 50% lower at $0.30. Looking beyond the headline numbers, there were some positive metrics, such as subscriber growth, and CEO Bob Chapek leaned on this when striking an optimistic tone overall with the release.
He told investors that “2022 was a strong year for Disney, with some of our best storytelling yet, record results at our Parks, Experiences and Products segment, and outstanding subscriber growth at our direct-to-consumer services, which added nearly 57 million subscriptions this year for a total of more than 235 million.” Still, this messaging will struggle to counter the overall negative effect that most streaming metrics will have had. Operating income was hit hard by a big slowdown in ad investment, which meant it was the company’s Parks unit that once again did most of the heavy lifting this quarter. Revenue gains there were 36% on the year, which went a long way to helping operating profits double.
Disney will be hoping this lopsided weighting is temporary, as their streaming business continues to hit serious scale while innovating for fresh revenues at the same time. Chapek spoke to this goal specifically when he said, “our fourth quarter saw strong subscription growth with the addition of 14.6 million total subscriptions, including 12.1 million Disney+ subscribers. The rapid growth of Disney+ in just three years since launch is a direct result of our strategic decision to invest heavily in creating incredible content and rolling out the service internationally, and we expect our DTC operating losses to narrow going forward and that Disney+ will still achieve profitability in fiscal 2024, assuming we do not see a meaningful shift in the economic climate.”
It’s looking like he will have to contend with a negative reaction in shares in the short term, as they traded down 8% in Wednesday’s pre-market session. Should they open here, they’ll be close to touching the lows from July, which themselves were the lowest levels since the pandemic fuelled crash of March 2020. It’s hard to believe that Disney went on to rally 155% from those lows, and perhaps harder still to accept they’ve since sold off more than 50% from the all-time highs they reached. But it’s a very different world now from what it was even one year ago, with soaring inflation making many families rethink their choice of an annual holiday if not their streaming service as well.
But if Disney can ride out the current turbulence, you have to be thinking it has brighter days ahead. As Chapek said, “by realigning our costs and realizing the benefits of price increases and our Disney+ ad-supported tier coming December 8, we believe we will be on the path to achieving a profitable streaming business that will drive continued growth and generate shareholder value long into the future.” This is still the entertainment giant it’s always been, with a $180 billion market cap that’s back trading at 2015 levels.
Disney’s leadership sees their DTC operating losses declining from this point forward, suggesting we could be approaching the nadir of investor sentiment. With shares starting to trade along a solid-looking line of resistance, it’s not unreasonable to think the bulls might draw a line in the sand
around here. If you think the worst-case scenario might already be priced in, that opens up the possibility of an aggressive recovery rally on the first sign of good news. This is definitely one to watch closely.
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