The Walt Disney Company (DIS, Financial) will celebrate its 100th anniversary in 2023. For the best part of the last century, Disney has been an exciting company as an investment and entertainment vehicle. The company had its ups and downs, but those who have remained bullish on the future of entertainment have reaped handsome rewards. From a small studio producing animated short films to a global entertainment conglomerate, Disney has had quite an impact on the world, which is one of the reasons why it continues to dominate entertainment media despite the rise of new technologies and innovative forms of entertainment.
This year is an important year for Disney because it may be the last year in which the company retains exclusive rights to its iconic character Mickey Mouse, which is expected to become public property in 2024.
Although Disney has managed to maintain its leadership position in the entertainment industry, the last few years were challenging. One obvious reason is the pandemic that impacted Disney’s theme parks business in 2020. Disney+, the company's streaming media platform that partially offset the impact of other business shutdowns, was the company's only hope that lived up to investor expectations. In some regions, such as China, the pandemic lockdowns lasted through 2022, but most of such restrictions have become a thing of the past in Disney’s key markets today.
With the disruptions from the pandemic coming to a close, what's ahead for Disney? Is the stock a good investment these days?
Leadership disruptions
Although the company has a history of nearly going bankrupt and then rebounding with greater success, this is highly dependent on the quality of the management team. For example, in 1984, when the animation studio was reporting significant losses, Michael Eisner was elected to lead the company, and Disney became overwhelmingly successful under his leadership. This was known as the Disney Renaissance.
After Bob Iger's retirement in 2020, Bob Chapek took over as CEO of Disney. Chapek aimed to implement changes and strategic initiatives to steer the company in the right direction amid the chaos created by the pandemic. However, many executives expressed to directors their lack of trust in him and complained to Iger about the company's direction under Chapek for months (for some reason, Iger himself reportedly encouraged this distrust of Chapek, despite having selected him as his successor). Chapek was eventually dismissed as CEO in November 2022, and the fiscal year's "Direct-to-Consumer" loss was cited as the reason for the CEO change. Iger has been reinstated as CEO and the market reacted positively to this development by sending Disney shares higher after the reappointment of Iger.
The encouraging signs
The pandemic closures in 2020 and 2021 impacted revenue from theatres and theme parks while increasing revenue from the streaming business. Disney has made significant investments in recent years to restructure its business to maximize long-term profits, including the launch of Disney+ and the acquisition of a majority stake in Hulu. In addition, the company made significant investments in the streaming industry, including a $30 billion investment in content in 2022 to expand Disney+ and its theatrical releases. However, with theatre releases and ticket sales remaining below pre-pandemic levels, Disney's media and entertainment segment revenue increased just 1% year-over-year in the first quarter of fiscal 2023 while operating income fell 7%, driven by a loss in this segment.
Although the restructuring was costly, this has allowed the company to compete with the industry leader Netflix Inc. (NFLX, Financial) in terms of subscriber growth. Disney+ reached 100 million worldwide subscribers in record time, aided by pandemic tailwinds and its brand recognition globally. The company assured investors that it expects operating losses to "narrow going forward" as it works to achieve Disney+ profitability by 2024. Furthermore, Disney has increased its average revenue per user by significantly raising prices across all of its services even while launching an ad-supported tier to lure more subscribers.
In terms of box office revenue, the reopening last year saw audiences and revenue gradually return, and this trend is expected to gather pace this year. On the plus side, with the release of Avatar: The Way of Water, Disney has already made huge progress toward recouping its losses in the media and entertainment segment. After only six weeks in theatres, the sequel to 2009's Avatar became a box office hit, grossing more than $2 billion and becoming the sixth highest-earning film in history. According to Variety, the film cost $350 million to produce, implying that the profits from the new film will boost Disney's media business. Furthermore, the studio has several releases for the rest of the year, which is likely to result in lower content costs and higher box office revenue.
The outlook for theme parks is improving too. In the most recent quarter, the Parks, Experiences and Products segment revenue increased by 21% year-over-year, and operating income from this segment rose 25%. This is a promising development as the theme parks business has always been a leading contributor to Disney’s profits compared to the losses of its DTC business. The company increased ticket prices and monetized once-complimentary services like its Fast Pass program to maximize revenue per consumer in the last quarter. Even as rising inflation reduced demand in other industries, Disney's park attendance remained high and spending per person increased nearly 40% compared to 2019. In response to consumer outrage, Disney reversed some of its price increases in January, including increasing the number of park days available at the lowest price point, but the company has not reduced ticket prices across the board. The company's focus on increasing revenue per person will allow it to maintain revenue if park attendance falls further during an economic downturn.
Takeaway
Despite recent headwinds, Disney will likely dominate the entertainment space in the foreseeable future. The company has come out of the Covid crisis as a stronger business with a meaningful share of the global streaming industry, and its legacy businesses are operating efficiently compared to pre-pandemic days as well. Short-term headwinds resulting from macroeconomic challenges might lead to some volatility in Disney shares, but the company seems like it could be a good bet for long-term-oriented investors looking for opportunities in the entertainment space.
