Why Investors Aren't Thrilled With Disney's Q3 Results Despite Its First Streaming Profit
Walt Disney (NYSE: DIS) stock is down 5% this year as investors are concerned about the company's future growth prospects. And that's even as Disney is coming off an encouraging quarter, where it posted a profit from its streaming business earlier than expected.
It should have come as a positive surprise, potentially sparking a rally for the stock, but that hasn't been the case. Why are investors down on the company's performance, and does the weakness in the stock's valuation make now a good time to add the entertainment stock to your portfolio?
Disney's direct-to-consumer streaming business is now profitable
Disney reported earnings this month and revenue for the period ending June 29 rose by 4% to $23.2 billion, coming in slightly better than analyst expectations of $23.1 billion. The company's adjusted per-share profit of $1.39 also soundly beat Wall Street estimates of $1.19.
The big positive for the business was that its direct-to-consumer (DTC) streaming segment, which includes Disney+, is now profitable. Its sales grew by 15% to $6.4 billion and it posted a profit of $47 million versus a loss of $512 million in the prior-year period. The company wasn't expecting it to be profitable until next quarter.
Positive surprises are usually catalysts that can send a stock price higher. Instead, there's been muted reaction from the market to this recent news.
Why aren't these results good enough to get investors excited about the stock?
While it was great news that Disney's streaming business is moving in the right direction, it's the experiences segment that is much more important for the company. Of the $4.2 billion in operating income that Disney generated from its segments last quarter (entertainment, sports, and experiences), it was experiences that brought in the majority of that, with its operating income totaling $2.2 billion. Entertainment, which includes the streaming business, totaled $1.2 billion, followed by sports at $802 million.
And it's the experiences segment, which includes Disney's theme parks, that's the biggest cause of concern for the company. Should the economy fall into a recession next year, traffic to Disney's theme parks could be underwhelming. Revenue from experiences only rose by 2% year over year in the most recent quarter, and things may not get much better soon.
When discussing the experiences segment, management noted that, "the demand moderation we saw in our domestic businesses in Q3 could impact the next few quarters." The company also expects the segment's operating income for the current quarter to decline by mid-single digits compared to the previous year.
While the operating profit from the DTC streaming business was a positive, when you consider it totaled just $47 million, it's a fairly modest slice of Disney's overall operating profit. It's ultimately the success of the theme park business that is likely going to dictate where the stock goes.
Is Disney stock a good value buy right now?
Shares of Disney have been floundering lately, and a big part of that is due to the concerning outlook for the economy and what it might mean for the company down the road. If there is indeed a recession next year, Disney's financials could come under more pressure and worse results may follow.
But if you're willing to hang on for the long term, the stock can make for an attractive buy right now. It is trading at 16 times its estimated future profits (based on analyst expectations) and its price-to-earnings growth ratio is just 0.40, indicating that there's some great value here based on the company's potential long-run growth prospects.
The short term could prove to be volatile for Disney but with a strong brand, popular theme parks, and now a profitable DTC streaming business, plus a modest valuation, there's reason to remain bullish on the stock if you're willing to be patient and just buy and hold.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Walt Disney. The Motley Fool has a disclosure policy.
