There's no denying that The Walt Disney Company(NYSE: DIS) misfired last quarter. Although its streaming business' swing to its first-ever operating profit is an exciting milestone to be sure, its theme parks are facing a tough battle with inflation -- its own, as well as the price increases crimping consumer spending. Disney stock fell more than 4% on Thursday following that morning's release of the company's fiscal third-quarter results.
I still contend that Walt Disney is a name worth buying, and even more so after Wednesday's weakness dragged shares to a multi-month low. The market's overlooking a handful of details here, some of which don't show up anywhere in the reported numbers.
Fiscal Q3 is a mixed bag
All in all, it wasn't a terrible quarter. Revenue grew from $22.3 billion to nearly $23.2 billion during the three-month stretch ending in June, just topping estimates of $23.08 billion. Non-GAAP per-share earnings improved from $1.03 then to $1.39 now, versus expectations of $1.20.
The quarter's biggest highlight was the company's streaming arm swinging to an operating profit. Disney+, Hulu, and ESPN+ collectively turned nearly $6.4 billion worth of revenue into operating income of $47 million. That's not much, but this business' results are on the right -- and sustainable -- trajectory.
Data source: The Walt Disney Company. Chart by author. Figures are in billions.
Disney anticipates an even bigger bottom line for its streaming arm for the quarter currently underway.
At the other end of the spectrum, Disney's theme parks are running into a stiff headwind. Revenue for its parks and experiences arm was only up 2% last quarter, while operating income fell 3% year over year thanks to "higher costs driven by inflation, increased technology spending and new guest offerings." Disney further believes "that the demand moderation we saw in our domestic businesses in Q3 could impact the next few quarters."
Investors mostly (and understandably) opted to see the glass as being half-empty rather than half-full.
If you look at the bigger picture, though, you'll likely see there's far more working in favor of The Walt Disney Company right now than there is working against it.
The Walt Disney Company is setting the stage for growth
Don't misread the message. Disney CEO Bob Iger's still got much to figure out in his second stint at the helm. However, he's already set much of the table, so to speak.
Take streaming as an example. He's successfully led a reduction of this arm's operating costs without undermining its ability to conduct and grow the business. Last quarter's streaming revenue was record-breaking as well. Now that the company's proven this arm is at least capable of operating in the black, Iger can justify making more investments in its growth.
And yes, complete control of streaming service Hulu is one of these prospective investments. As it stands right now, Comcast still owns one-third of Hulu's platform, enough to prevent Disney from fully leveraging its reach. The Walt Disney Company has the right to purchase this remaining share from Comcast, and while it won't be cheap (a possible price tag of more than $13 billion), outright owning it will give Disney enormous leverage with not one but two well-known and well-used streaming platforms.
There's hope for the media company's struggling film arm as well.
As owner of both Star Wars and Marvel's intellectual property, Disney dominated the box office between 2006 and 2019. Things haven't quite been the same since pre-COVID 2019, when Avengers: Endgame ended up being the company's last mega-hit. Iger even acknowledged last year that the company's film-making arm "lost some focus," resulting in a few too many subpar films.
There's hope, however. Inside Out 2 has grossed more than $600 million since its mid-June release, according to data from The Numbers. And, although it wasn't released until after the fiscal third quarter was over, Deadpool & Wolverine has already generated nearly $1 billion in worldwide ticket sales since its debut late last month.
Disney appears to have at least some of its movie mojo back, and more likely hits are in the lineup. A feature film about Star Wars character "The Mandalorian" and sequels Frozen 3 and Toy Story 5 are slated for release in 2026, while the next Captain America film and a live-action remake of Snow White are anticipated for next year.
Look for at least some of Disney's cable television arm's weakness to be offset in the foreseeable future as well. While it's unlikely to replace or displace the media company's linear TV arm as a profit center, next year's launch of a streaming stand-alone version of ESPN is the product many current cord-cutters and cable-nevers have been holding out for. In the meantime, Disney has already priced a streaming package that bundles Fox's, Warner Bros' Discovery's, and ESPN's sports content into a single service. This won't be a game-changer either, but it should at least quell some of the headwind that shaved 7% off last quarter's linear (cable) television business.
Also recognize that while the company's Experience arm -- theme parks and hotels -- is hitting a wall, the company shuttered its Star Wars-themed hotel in September of last year. It's just one locale, but at a price of over $1,000 per person per night, that's a lot of revenue that's no longer being driven.
Meanwhile, although theme park prices and related costs have soared beyond the reach of most people, that's a headache largely limited to Disney's theme parks and related hotels. Its more affordable vacation options like maritime cruises are holding up with decent pricing power. In fact, two new cruise ships will soon be added to its fleet. In this vein, both Carnival and Norwegian Cruise Lines are reporting more demand for leisure cruises than either company can currently handle.
Opportunity knocks
The problem? None of this qualitative information is evident in the quantitative disclosures investors typically use to make buy/sell decisions. Most of the above is also forward-minded rather than backward-looking, making a purchase of Disney stock an even bigger leap of faith.
Companies are always more than mere numbers, though. Ditto for their stocks. Stocks also (eventually) reflect a company's future prospects, rather than its past performance.
That's a particularly relevant idea for anyone eyeing The Walt Disney Company right now. The company's not exactly firing on all cylinders here, but it's seemingly setting the stage for a rekindling of its glory days as an entertainment powerhouse. It's just been a little painful getting prepared for this reinvention.
Regardless of the reason for it, I'd use this stock's 30% pullback from April's peak as an opportunity to jump in before everyone else starts connecting the dots.
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James Brumley has positions in Warner Bros. Discovery. The Motley Fool has positions in and recommends Walt Disney and Warner Bros. Discovery. The Motley Fool recommends Carnival Corp. The Motley Fool has a disclosure policy.
