Is Disney stock a buy that ad-supported Disney+ brought to life?

Disney stock has underperformed significantly this year, falling more than 40% since January. The stock has also been down by around 8% in the last month. There are quite a few factors holding Disney back. Disney reported a weaker-than-expected set of Q4 FY’22 earnings in early November. While revenue rose 9% year-over-year to $20.15 billion, adjusted earnings came in at $0.30 per share, down from $0.37 in the prior quarter. While revenue growth was driven by a rebound in the company’s US theme parks and resorts and subscribers to its streaming offering, this was partially offset by weakness in its international theme park business. Disney+ ended the quarter with 164.2 million subscribers, up nearly 39% compared to last year. Disney’s profitability has taken a hit due to investments in the streaming business. During the fourth quarter of FY’22, the operating loss in the streaming business more than doubled year-over-year to nearly $1.5 billion. This does not go down well with investors, who have increasingly prioritized cash flows amid rising interest rates. Separately, growing economic headwinds and concerns about consumer spending could also hurt the Parks business, which has significantly supported the company’s profitability in recent quarters.

However, there are positive factors that could make Disney stock worth watching at today’s levels of around $92 per share. Bob Iger returned as the company’s CEO last month and indicated that a top priority was making the company’s streaming business profitable. As previously planned, starting December 8, Disney will raise the prices of Disney+ to $11 per month in the US, up from the current $8 per month. Disney will also launch a new ad-supported tier of Disney+ priced at approx. $8 per month starting December 8th. This is likely to help monetize streaming and profitability, as ad-supported tiers typically have higher average revenue per user compared to ad-free plans. Disney is also taking broader measures to rein in costs, introducing a hiring freeze, and has also cut some positions.

Disney stock currently trades at roughly 22x consensus FY’23 earnings. While this may not exactly be cheap in the current environment, given that broader market multiples have been reduced, the risk-to-reward positioning for Disney stock appears favorable given the improved outlook for Disney’s currently loss-making streaming business. Moreover, investors have historically placed a premium on the company’s deep content library and iconic franchises. We value Disney stock at around $118 per share, which is about 30% above the current market price. See our analysis of Disney’s valuation for more information on what drives our price estimate for Disney and how the valuation compares to others. See our analysis of Disney earnings for a closer look at the company’s main revenue streams and how they’ve evolved.

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