Are you a Disney shareholder? If you are, you probably know that Disney’s share price has not performed too well this year. The stock fell ~60% from its peak in March 2021. The current share price is back to its COVID lows and much lower than five years ago. What happened? Has Disney lost its magic?
Disney’s Competitive Moat
Who doesn’t know Disney? Disney is one of the most valuable brands in the world. Your children and your parents probably know Disney. Yes, that is how strong the Disney brand is. Brand equity is one of the main competitive moats of Disney. Do you recognize any of the below?
Besides the popular characters such as Mickey Mouse, Aladdin, Lion King, Snow White, etc., Disney also owns Marvel with its Marvel Cinematic Universe (Iron Man, Captain America, Hulk, The Avengers, etc.), Star Wars, Pixar, as well as ESPN, ABC, Hulu, National Geographic, and many more. With such a strong brand equity, why has Disney performed poorly in recent years?
Disney’s Revenue Model
How does Disney make money? Let’s take a look at its revenue model:
Disney’s revenue model is categorized into two major segments:
- Disney Parks, Experiences, and Products
- Disney Media and Entertainment Distribution
The parks, experiences, and products segment contributes to 35% of Disney’s total revenue, while the media and entertainment distribution contributes to 65% of the total revenue.
Disney Parks, Experiences, and Product
Disney Parks, Experiences, and Products segment includes the Disneyland theme park, merchandise, and toys. This segment is doing well, with revenue growing double-digit YoY and highly profitable. Here is the summary of Disney’s revenue from this quarter’s financial report:
As we can see from the report, the Disney Parks, Experiences, and Products segment grew 13% compared to the same quarter last year. The income also increased by 11%. It’s looking good so far.
However, if we look at the media and entertainment distribution segment, we can see that this business unit is not doing well. It indeed performed poorly as of this quarter. What is happening here?
Disney Media and Entertainment Distribution
Disney Media and Entertainment Distribution segment includes the network/cable TVs, direct-to-consumer / streaming, and licensing. This segment contributes to 65% of Disney’s revenue. And unfortunately, it has not performed too well. Let’s dive deeper into this segment:
This business unit’s primary revenue streams are Linear Networks (network/cable TV) and Direct-to-Consumer/streaming. The linear networks segment is a dying business. Revenue has been declining YoY. This quarter’s revenue dropped 7% compared to last year’s. However, the good news is that this segment is still profitable, earning Disney around $1.9 billion. The bad news is that the income is shrinking, dropping 23% YoY.
Now, let’s look at the Direct-to-Consumer segment, which includes Disney+, Hulu, and ESPN+. The good news is that revenue grew 9% over the same quarter last year. The bad news is that this segment is not profitable. It has not been profitable so far because Disney needs to invest much money to reach the economy of scale for its streaming business to break even. Disney has been trying to transition its dying network/cable TV business into the streaming business and investing significant resources over the years, thus impacting its profitability. It also faces tough competition from the likes of Netflix.
But at least there is a silver lining: the loss has narrowed quite a bit if we compare it to the same quarter last year, down 52%. Disney management projects the streaming business to break even in 2024. What do you think? Will Disney break even on its streaming business by next year?
Disney’s Revenue Growth
Here is the chart of Disney’s revenue and free cash flow over the years:
Disney’s revenue is still growing consistently, but not its profitability. Disney has been investing a lot into its streaming business, causing profitability and free cash flow to be impacted. For the free cash flow to grow again, Disney’s streaming business must be profitable and contribute to the company’s bottom line. If you think the management’s expectation of breakeven in 2024 is reasonable, next year may be the time when the free cash flow starts growing again.
Disney-DeSantis Legal Battle
Additionally, Disney is embroiled in a legal battle with Florida Governor Ron DeSantis. In February 2023, DeSantis dissolved the Reedy Creek Improvement District, home to the Walt Disney World Resort. Disney previously controlled this district, allowing it to decide what to build in the area. But, it was recently stripped of those powers by DeSantis.
This legal battle adds even more negative sentiment to Disney’s stock price.
What Do You Think?
Disney is betting its success on the direct-to-consumer segment. Can Disney successfully leverage its brand equity to compete with established players like Netflix and transition into the streaming business?
If you think Disney’s fundamental is intact and believe the company will turn around soon, this can be the time to research further into Disney stock.
Will the sentiment turn, and can Disney regain its magical touch?
