2023 seems to be a year of boomer stocks after a scintillating 2020 and 2021 where hyper growth stocks shot for the moon (and crashed back to Earth).
After Microsoft’s limelight due to ChatGPT, another boomer stock that got into the news was none other than The Walt Disney Company (NYSE: DIS). Disney’s price is currently up by around 24% from its 6-month low.
So, is it too late to buy into Disney’s shares?
Let us look at their latest financial and business model prior to making a bull or bear case.
1. Clear objectives in place
Disney was a company mired in mutiny and trouble back then. Its parks and entertainment business got severely hit during the COVID-19 pandemic. Leadership was also troubled when Bob Chapek took over as CEO. Then, there was the outburst and potential lawsuit with Scarlett Johansson.
When Bob Iger returned, markets were bullish on it. And now that we have at least 1 quarter of results under Iger’s leadership, the game plan for Disney has started to crystalize.
The strategic priorities have been clearly highlighted in their latest Q1’23 earnings presentation. Iger’s return is temporary, hence the intense focus on reorganizing the leadership structure.
Disney’s executives’ succession planning has been thrown into disarray, and under Iger’s return, they have sought to focus more on this.
2. Aggressive cost reduction
One of the key highlights of this earnings presentation was the big challenge that Disney has committed to – it has set a target of USD 5.5 billion for cost savings. This includes around USD 3 billion of annualized savings in non-sports-related content spend, which should be realized over the next few years.
The balance of USD 2.5 billion will be from the sales, general & administrative expenses.
It’s imperative to understand that although cost savings targets are set to be reached within the few years since inception, it’s the latter years where superior earnings and margins are reported.
3. DTC optimization and growth
Disney+, Disney’s answer to Netflix for video-on-demand streaming, is categorized under their Direct-To-Consumer (DTC) category. Disney holds an enormous amount of intellectual property and rights, that can be visualized and made into endless content. But what content to make, the potential reception of the content, and even the monetization of the characters and movies will be focused on aggressively to rationalize spending.
As Disney+ sucker punched Netflix in rolling out a cheaper advertisement-supported tier, this not only allows Disney greater pricing muscle but also an opportunity to grow global subscribers and even grow a new advertising pillar from their DTC business!
4. Greater Park experiences and flexibility
No grand plan is complete without mentioning its park’s business model. To enhance guest experiences in anticipation of higher guest loads, Disney is rolling out a reservation system to manage attendance during peak holiday weeks. This ensures that the magical experiences of guests in the theme park are managed and achieved.
As for the affordability perspective, lower-priced ticket availabilities have also increased, while also dolling out more access to annual pass holders.
5. The return of Dividends
Ever since the outbreak of the COVID-19 pandemic, Disney’s net profit has not been the same as pre-pandemic.
Granted revenue has continued growing, but net profit is nowhere close to the USD 11.054 billion it achieved in FY 2019.
This has also impacted its dividend payout, which used to be on a steady up trend on a per-share basis.
Thankfully, the dividends will be coming back as an optimistic growth trajectory will allow Disney to continue paying out dividends after the absence of it for 2 years.
6. Stemming the DTC losses
Video streaming subscription is still a high growth phase for some companies. The adage growth at all costs might lead to hemorrhaging losses.
However, after Iger took over, one of his key objectives was to also stem the losses of its DTC vertical. Operating losses for Q1’23 narrowed from USD 1.5 billion to USD 1.1 billion on better selling, general, and administrative expenses.
As paid subscriptions of Disney+, Hulu, and ESPN+ approach Netflix’s total subscriptions number, the race for profitability beckons.
7. The “Disney” flywheel
Although this is not included in Disney’s quarterly results, it is natural for how resilient Disney is even in the face of the likes of Netflix, which is said to be the bane of Hollywood and entertainment back then.
Disney’s flywheel model protected it from the shock when Netflix entered the video-on-demand streaming subscription business. Disney might be late in the game, but here we are today looking at a Disney that is much more sophisticated and stronger, while Netflix is still pondering new verticals (remember the gaming initiative?)
Disney’s flywheel model has never really changed ever since its conception until now. Content that is created gets pushed to the screens, while the images and rights of these contents and characters are then licensed for merchandizes and made into park attractions.
This can go on so long as the best creators and content are produced and marketed. Iger understands this; he has reversed the appointment of business executives to head Disney units and has put the creative people in charge.
Is it too late to buy Disney?
Is Disney going to stop producing content for moviegoers or even its Disney+ subscribers? Are you a Marvel Cinematic Universe fanatic or Star Wars geek?
So long as you are willing to pay to watch or stream Disney’s content, you answered the question.
Price is what you pay, value is what you get. If movie tickets or a monthly streaming subscription is not holding you back from continuing your entertainment, so why should a 24% jump in Disney’s share price stop you from investing in the company, if the fundamentals are intact and promising?
Food for thought!
