Disney’s stock was down 9.5% following the release of its quarterly results. The most obvious issue that stood out was Disney’s losses, which reversed the profits from the previous quarter.
The loss was caused by an impairment of its goodwill, which is non-cash and non-recurring in nature. The impairment, amounting to $2 billion, represented nearly 10% of its revenue for the last quarter. This alone wiped out all the profits and then some. Excluding this, earnings actually grew by 30% year-over-year, and its free cash flow increased by 21%.
This impairment was linked to Star India and its cable network following the restructuring of Star India into a new media entity. Disney acquired Star India for over $15 billion, but it was only valued at $3-3.5 billion for the merger. This represents a substantial loss, and it remains unclear whether the impairment is complete or if more is expected in the future.
Disney still carries $74 billion worth of goodwill on its balance sheet, most of which is related to the massive $71.3 billion acquisition of 21st Century Fox in 2019. Prior to this, in 2018, the goodwill stood at $31 billion.
It’s apparent that the acquisition has not yielded the expected results, and Disney has struggled to leverage it effectively in enhancing its business. This suggests that the goodwill is likely to be further impaired in the future, potentially leading to more losses for Disney. Additionally, a portion of the goodwill is tied to the cable TV sector, which is on the decline. These assets are also likely to be impaired.
Turning this situation around is no easy task, as you can see. There’s considerable baggage to shed. Even though Disney+ has performed well and is expected to turn profitable in the fourth quarter of the current fiscal year, future impairments will likely continue to be a drag.
Disney’s stock has rebounded, up 16% year-to-date, even after accounting for the recent 10% drop. It appears that Bob Iger has managed to initiate a turnaround over the years, though significant challenges remain.
Competition is intensifying across multiple business segments. In the streaming arena, Disney is in direct competition with Netflix, which grew faster at 15% year-over-year, while Disney’s direct-to-consumer segment grew by 13% in the recent quarter.
ESPN is facing increased competition from big tech companies like Alphabet and Amazon, which have secured exclusive sports content for their platforms, driving up prices and compressing profits.
One segment that investors might be overlooking is content sales/licensing, which includes theatrical releases. Revenue from this segment plunged 40%, a downturn attributed to Disney’s restrained release of new films.
I’ve stated many times before, Disney’s current offerings are underwhelming. Disney’s magic hinges on delivering an enchanting experience through its content. Until I am inspired by a Disney film once again, I will not consider becoming a shareholder.
