Why is Disney stock down? Can We Make Money if it rebounds in 2023?

Shareholdr.com
7 min readDec 27, 2022

Walt Disney (NYSE: DIS) shares are down more than 40% year-to-date (YTD), underperforming the S&P 500 by a wide margin. Disney shares have been impacted by a post-Covid slowdown in its streaming business. Why is disney stock down 2022?

The DIS stock underperformance prompted the Board to react and replace CEO Bob Chapek with legendary executive Bob Iger, who led Disney from 2005 to 2020. This is why some long-term Disney investors will hope the stock can re-rate higher in 2023, as Iger paints the comeback picture.

Weak FQ4 final nail in the coffin for Chapek

Disney stock fell more than 13% in November after the company’s disappointing quarterly results fell short of Wall Street estimates. The company’s guidance also missed the average analyst estimate for the fiscal year 2023, driving the stock to its lowest level in more than two years, despite the fact that Disney+’s ad-supported tier is scheduled to launch next month.

Even though Disney’s streaming division revenue climbed by 8% to $4.9 billion, the unit reported an operating loss of around $1.5 billion for the quarter, almost doubling its losses from the same period in the previous year. The business cited the rise in increased losses at Disney+ and ESPN+ and a weaker performance at Hulu as the main reasons behind the overall rise in losses.

Disney still anticipates Disney+ to become profitable in fiscal 2024, despite the streaming industry not yet produced a profit since its 2019 debut.

“I am an optimist, and if I learned one thing from my years at Disney, it is that even in the face of uncertainty, perhaps especially in the face of uncertainty, our employees and Cast Members achieve the impossible,” Reuters cited a note sent by CEO Bob Iger to employees.

The guidance for yearly sales growth was less than anticipated, hurting Disney’s stock. Analysts had forecast a 25% increase in operating earnings for the fiscal year 2023, whereas Disney estimated a “high single-digits” gain.

“Rarely have we ever been so incorrect in our forecasting of Disney profits,” MoffettNathanson analyst Michael Nathanson wrote in a note to clients.

“Given the company’s confidence that Parks trends appear resilient, the culprit for the massive earnings downgrade is much higher than expected (direct-to-consumer streaming) losses and significant declines at linear networks.”

Disney’s CFO Christine M. McCarthy predicts that streaming operating profits will increase by at least $200 million in the first quarter of fiscal 2023.

Some positives give investors hope

It hasn’t been all bad news for Disney, as the FQ4 report shows that Disney+, Hulu, and ESPN+ all surpassed the number of streaming subscriptions expectations. The media conglomerate completed its fiscal 2022 year with more than 235 million streaming customers overall.

The combined global subscription count for Disney’s portfolio of direct-to-consumer services has topped 235 million, up from the 221.1 million subscriber count at the end of Q2. Analysts had predicted an increase of 8.9 million subscribers for Disney+, but the streamer added 12.1 million accounts, to a total of 164.2 million for the quarter.

According to Disney+, “Hocus Pocus 2,” “Andor,” “Ms. Marvel,” and “She-Hulk” were the top performers of this streaming period in terms of both acquisition and engagement. Other Disney+ originals that came out at the time include Tom Hanks’ “Pinocchio,” “Obi-Wan Kenobi,” and the second season of “The Mighty Ducks: Game Changers”.

Another positive mentioned in the earnings call is the commitment of 100 advertisers to the ad-supported Disney+ tier, even though the debut won’t have a significant financial impact until later in fiscal 2023.

The ad-supported plan, called Disney+ Basic, will debut first in the United States on December 8 for $7.99/month. The cost of the existing ad-free Disney+ will climb to $10.99/month and will be marketed as Disney+ Premium.

With regard to the future, Morgan Stanley analyst Ben Swinburne wrote in a note that Disney “will need to continue to drive international net additions while it begins to drive more meaningfully through price increases and the introduction of its ad tiers”.

Iger’s return — a long-term positive

Disney’s recent struggles have led the company to a decision that surprised everyone last month. Only one year after announcing his retirement, Bob Iger, Disney’s most successful CEO and 15-year leader, has come back to take over again.

“The Board has concluded that as Disney embarks on an increasingly complex period of industry transformation, Bob Iger is uniquely situated to lead the Company through this pivotal period,” Susan Arnold, Disney’s Chairwoman, said in a statement.

This move corresponds with the entertainment company’s drive to increase investor trust and earnings in its streaming media department, leading to an immediate 6.3% share price increase after the news broke out.

“I am an optimist, and if I learned one thing from my years at Disney, it is that even in the face of uncertainty — perhaps especially in the face of uncertainty — our employees and Cast Members achieve the impossible,” Iger said in a memo to staff.

Disney’s yearly shareholder returns during Iger’s first term were over 14%, well above those of Comcast’s competition and the general stock market. At the time, the company increased its enterprise value five-fold by making many significant purchases, such as Pixar Animation Studios, Marvel Entertainment, and 21st Century Fox.

Some also felt that Disney was winning the streaming war against Netflix in 2020 when they announced that 71-year-old Iger will be replaced by Bob Chapek, who took over just before the pandemic broke out. The COVID-19 restrictions forced the company to close its parks, which are generating cash that is used to fund Disney’s major streaming push.

Chapek announced a hiring freeze at the beginning of November, which turned out to be one of his last moves at the helm of Disney. Despite the differences between the two, Iger said maintaining the freeze is the “sensible thing to do.”

The length of the employment freeze will be taken into consideration when he discusses Disney’s overall “cost structure,” he added.

Iger’s return was welcomed by the majority of analysts and employees.

“Maybe the old hand on the tiller is what’s required,” Markets.com analyst Neil Wilson said.

Even Netflix co-founder Reed Hastings commented on Iger’s return with a tweet: “Ugh. I had been hoping Iger would run for President. He is amazing.”

Still, not everyone was happy to see Iger coming back to Disney. According to Wall Street Journal, Nelson Peltz, a co-founder of Trian Fund Management LP, is a shareholder who was not so keen on Iger’s return as Disney CEO. Trian reportedly purchased Disney stock for more than $800 million in the days following its underwhelming earnings announcement.

Trian has expressed interest in joining the board of directors as it pushes the media and entertainment behemoth to make cost and operational changes. The investment, which is below the 5% disclosure standard, is smaller than Trian would want it to be and will probably increase depending on market circumstances, the WSJ report added.

Iger’s current agreement with Disney sees him as CEO for the next two years and he will also be involved in picking out his successor.

What can Iger do to help Disney stock?

Besides mentioning the current employment freeze, Iger talked about different areas to concentrate on with regard to the Disney+ streaming service. He highlighted “creativity” as the company’s primary area of attention.

Analysts widely expect the new CEO to focus on costs and content in the near term before shifting his focus toward making changes to fit his long-term vision for Disney.

Iger already talked about shifting Disney’s focus from creating a lot to how “great the things are that we do create.” Instead of “chasing subs with aggressive marketing and aggressive spend on content,” the company should focus on “chasing profitability,” he said. For that to happen Disney needs to reevaluate the cost structure across its businesses, Iger added.

“A number of you who worked with me know I’m obsessed with that. But I’m obsessed with that for a reason. It is what drives the company,” he said.

Soon after being named CEO, Iger overhauled Disney’s content distribution hierarchy and announced that Kareem Daniel, the head of the division in charge of the company’s media and entertainment distribution, would step down. One of the main challenges for Iger going forward will be withstanding shareholder pressure.

The Third Point, an investment advisory company led by billionaire Daniel Loeb, was one of the shareholders that applied pressure on Disney this summer.

Loeb started promoting reforms, such as the ESPN sports network being spun off Disney, and urging the anticipated acquisition of Hulu from minority-owner Comcast Corp. Wells Fargo analysts also pitched the idea for Disney spinning ESPN/ABC off to create additional value for shareholders.

Additionally, Third Point urged Disney to replace its board members, and the two parties came to an agreement in September that gave former Meta CEO Carolyn Everson a seat on the board.

Final Thoughts

Disney stock is underperforming the market in 2022, a key reason why the Board decided to sack the former CEO Bob Chapek and replace him with his predecessor, Bog Iger. While many investors expected Disney to perform at least in line with the rest of the market, Disney shares are having a disappointing year.

Long-term investors and shareholders are now pinning their hopes on Bob Iger and his idea that Disney needs to be creative again to create value, which would then facilitate a re-rate higher in Disney stock.

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Originally published at https://shareholdr.com on December 27, 2022.

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