Disney reported a mixed set of Q2 FY’24 results, with revenue growing by about 1% year-over-year to $22.08 billion and earnings coming in at $1.21 per share. The company’s streaming business saw losses narrow, but the stock dropped by close to 10% as the outlook for its experiences segment for the third quarter was weaker than expected. This segment had been driving Disney’s revenue, with a 10% increase in experiences revenue to $8.4 billion in Q2 driven by stronger guest spending in the U.S. theme parks, growth at the Disney Cruise Line, and higher attendance in Hong Kong parks. However, the outlook for the next quarter is lackluster due to higher expenses and an expected normalization in attendance following the surge in demand post-Covid-19.
Disney’s linear TV business faced some headwinds in Q2, with lower advertising and weaker affiliate revenues in the domestic market leading to a 9% decline in overall Linear Networks sales to $2.76 billion. On the other hand, the streaming business performed well, with Disney+ and Hulu becoming profitable for the first time in the quarter due to an increase in Disney+ subscribers and rising average per user revenues. Disney+ core subscribers grew by over 6 million in the second quarter, and total streaming revenue was up 13% to $5.64 billion, with operating income at $47 million compared to a loss of $587 million in the year-ago period.
Disney’s stock has seen a sharp decline of 40% from early January 2021 to around $105 now, underperforming the S&P 500 over the last three years. In comparison, the Trefis High Quality Portfolio, consisting of 30 stocks, has outperformed the S&P 500 each year over the same period. Despite concerns in the streaming and media operations, Disney remains positive on Disney stock as the company looks to unlock more value by restructuring its business and cutting costs to bolster profitability. The stock is down by over 45% from its highs in 2021 and trades at about 23x forward earnings, with Trefis valuing Disney stock at around $137 per share, about 30% ahead of the current market price.
The uncertain macroeconomic environment with high oil prices and elevated interest rates raises concerns about whether Disney could face a situation similar to the past three years and underperform the S&P over the next 12 months, or if it will see a recovery. Despite these challenges, the company’s efforts to restructure its business and improve profitability, combined with its current valuation, suggest that there is potential for long-term growth. The Trefis High Quality Portfolio’s outperformance compared to the S&P 500 over recent years further supports the idea that Disney stock may be undervalued in the current environment.
Investors looking for stable returns with less risk may find Disney stock appealing, as the company continues to navigate challenges in the entertainment industry and explore opportunities for growth. With a focus on cutting costs, improving profitability, and restructuring its business to unlock more value, Disney aims to position itself for success in the long run. The stock’s current valuation and potential for recovery make it an intriguing option for investors seeking opportunities in the ever-evolving media and entertainment landscape.
