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Walt Disney Company(DIS-N)

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Where Will Disney Stock Be in 1 Year?

Motley Fool - Wed Mar 29, 9:46AM CDT

After a volatile 2022 that ended with the climactic return of former CEO Bob Iger, WaltDisney's (NYSE: DIS) drama story is finally calming down. The entertainment and media giant posted mostly mediocre results in fiscal 2023's first quarter (which ended Dec. 31, 2022), and its stock is trading down about 31% over the past year. But with the popular Iger back in the driver's seat and some important developments well underway, Disney stock should look very different by this time next year.

Disney is settling into a streaming routine

The part of Disney's operations getting the most attention lately is its streaming business, which includes its flagship service Disney+ as well as Hulu, ESPN+, Star+, and After a hugely successful launch and three years now of operation, Disney+ provides service to nearly 162 million subscribers and continues to roll out to additional global markets. Keeping the interest of those subscribers has also meant Disney+ has high expenses related to both production and the rollout. The losses created by the service are weighing down Disney's profits. Revenue for its direct-to-consumer segment, which includes the streaming networks, increased 13% year over year in the first quarter, but the operating loss for that segment grew by 78%, from $593 million last year to more than $1 billion this year.

Management reaffirmed in its most recent earnings call that Disney+ should become profitable by the end of 2024. It raised subscription prices in December and launched an ad-supported subscription tier. So far, the response from subscribers has been as expected. It also substantially lowered expenses in the first quarter as it winds down its blitz rollout, and it expects that to continue into the second quarter.

Creating dreams with parks and experiences

In the meantime, parks and resorts are back in action and thriving. Revenue for the segment increased 21% year over year in the first quarter while operating income was up 25%. Demand has been very high, and Disney was able to raise prices without curbing that demand. Future bookings also suggest the demand is sustainable, putting this segment in a great position for the near future.

Driving engagement through its media empire

When Iger reassumed the CEO role, he admitted that Disney needs a major reboot, with the goals of improving engagement and profitability. He is centering his strategy around giving the creative team more power and accountability.

Management reorganized at the beginning of the pandemic into two major segments, down from four. Now, Iger is restructuring the company again, this time into three segments: 1. Entertainment, 2. ESPN, and 3. Parks, experiences, and products. What's new and interesting here is the singling out of ESPN, which has never been its own segment.

Iger committed to a cost-saving program to cut $5.5 billion over an unspecified amount of time. Of that, $3 billion would be related to content, while the other $2.5 billion would come from other areas, such as eliminating 7,000 jobs. Disney employs about 220,000 people globally.

Part of becoming more efficient is focusing on core brands and franchises, which deliver higher returns. These are brands like Star Wars, Avatar, and Frozen, and in particular, the Marvel Cinematic Universe, which drive high engagement and sales through films, other content, and products. For example, Avatar: The Way of Water was released in December and ticket sales make it the third-highest-grossing film ever. Fans can load up on the experience with a Disney World attraction called Pandora -- the World of Avatar. Disney will be launching an Avatar-themed attraction at Disneyland as well.

Where this could all end up

Disney stock is up 10% so far this year, and shares are trading at a very reasonable 2 times trailing-12-month sales. Other valuation multiples are harder to assess because Disney's profitability has been so volatile, but that already says something.

If things go according to plan, Disney should be a more efficient and profitable company this time next year, with a flourishing streaming business and lots of new content to feed its machine. If that happens, and if it coincides with an improved economy, Disney stock could soar. The likelihood is that profitability metrics will improve at least to some degree, and new media and experiences will drive sales growth. In any case, Disney's long-term potential remains robust, and investors should consider buying shares at this price.

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Jennifer Saibil has positions in Walt Disney. The Motley Fool has positions in and recommends Walt Disney. The Motley Fool recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.

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