Disney Was Dead Money for a Decade. 3 Reasons That Might Eventually Change

It’s hard to find a more specific company competitive advantages but it has performed worse than the stock market over the past decade Walt Disney (EXTERNAL 6.23%).

The entertainment giant has been a household name for nearly a century and has been a leader in family entertainment since its launch. Snow WhiteThe first feature-length animated film in 1937. Today, his empire includes ESPN, properties from the Fox acquisition including Hulu and Hotstar in India, six category-defining theme parks worldwide, a cruise and vacation business. its major consumer products business, which licenses intellectual property rights for toys, clothing and other products, and of course its main TV and film business, including ABC, Disney+ and other streaming platforms.

Despite this apparent strength, the stock has floundered over the past decade due to broader turmoil over video entertainment industry. The shift to streaming has disrupted the traditional linear media ecosystem that depends on box office revenues, cable subscribers and advertising fees. Operating income began declining in 2019 and collapsed during the pandemic, still not reaching its pre-pandemic peak.

But the company showed signs of turning the corner in its fiscal fourth-quarter earnings report ended Sept. 28. The stock rose as much as 12% on the news. Let’s take a look at three catalysts that could finally make the stock a long-term winner.

Image source: Disney.

1. Discharging from linear media is basically done

Like its legacy media peers, Disney has struggled with the transition from linear media to streaming. Cable revenues collapsed due to cable cuts, and the company also lost most of its advertising revenue. But the fourth-quarter numbers were notable because gains from streaming outpaced losses from linear media.

In its direct-to-consumer segment, which consists of non-sports streaming platforms, the company reported a profit of $253 million, compared to a loss of $420 million in the prior-year quarter. Operating income on linear networks fell from $805 million to $498 million; This means the company has almost passed the torch from linear to streaming when it comes to profits.

Overall operating income in the entertainment segment increased during the fiscal year, but that was mainly because the company erased deep losses in the direct-to-consumer segment. Now the company finally looks ready to move forward with its DTC-first strategy, boosting its overall entertainment profits.

As Disney’s ad impressions have increased, so has its ad revenue, and the company appears to be following Disney’s lead. netflixThe advertising layer has attracted 70 million subscribers since its launch two years ago.

2. Parking business continues to strengthen

While Disney’s core entertainment business is shaky, it continues to invest in its theme park business, which is expected to continue growing in the coming years.

Weakness in the international segment in the fourth quarter overshadowed strength in the domestic business, with operating income down 6% in the quarter to $1.66 billion, but still up 4% for the full year to $9.3 billion.

Management expects growth to continue next year and is calling for 6% to 8% growth in the segment’s operating income, mainly toward the back half of the year. Meanwhile, the company continues to invest in the business, with the Disney Treasure cruise ship opening next week and seven ships in development.

Although results in the parks business have been volatile, it is expected to grow steadily, especially as the company adds new ships and new experiences to its theme parks.

3. ESPN’s flagship effort could be a big winner

Disney is finally launching its flagship ESPN network next fall, and it will help bridge the gap between linear and streaming media.

ESPN has long been the company’s most valuable television asset, and it has leveraged its sports rights ahead of launch. CEO Bob Iger also talked about some potential innovations in a streaming app, including having a personalized AI-powered SportsCenter with a customized sports experience. In other words, the product has the potential to be the best sports entertainment experience ever made.

Iger also noted that live television, especially live sports, is “extremely attractive” to investors, and those relationships should help ESPN’s flagship app become a winner, too.

Altogether, Disney appears to be finally emerging from its years-long shift to streaming, fueled by profits in DTC, a growing subscriber base, strong advertising adoption, a booming parks and experiences business, and excitement likely to build around the launch of its ESPN flagship app.

Management has pleased investors by guiding for high-single-digit EPS growth next year, and margins will continue to expand as the streaming business grows. Disney finally looks ready to put a lost decade behind it.