Walt Disney Stock Looks Marvelous for Patient Investors

 | Jan 03, 2023 05:20AM ET

  • The Marvel Cinematic Universe (MCU) Phase 5 Will Commence in 2023.
  • Bob Iger has returned as CEO under a two-year contract and replaced Bob Chapek.
  • Iger has stated profitability is a top priority, and no longer growth for its Disney+ and DTC segment.
  • DIS stock is trading at 20X forward earnings and has returned to pre-COVID and pre-Disney+ levels.

    • Media and entertainment giant Walt Disney Company (NYSE:DIS) enters 2023 under new but familiar leadership with the return of Bob Iger as its CEO. Iger was the previous CEO for 15 years until his departure in 2020, moving on to the role of Executive Chairman of the Board. Its newly crowned CEO Bob Chapek, was unlucky as the COVID-19 pandemic struck just a month into his tenure.

    Things went downhill fast due to the lockdowns as it had to shut down its parks and cruises. Even its movie theater distribution channel and production slate were shut down due to the social distancing and lockdown mandates.

    So it concentrated on bolstering its digital entertainment and streaming content, known as its direct-to-consumer (DTC) segment, as it grew its subscriber numbers dramatically, led by Disney+. It also launched its ad-supported tier on Dec. 8, 2022.

    h2 Streaming Wars /h2

    The market had given Disney shares a 40% premium because of the streaming wars heating up with Netflix (NASDAQ:NFLX), Amazon.com (NASDAQ:AMZN), Warner Bros Discovery (NASDAQ:WBD), Comcast (NASDAQ:CMCSA), Paramount Global (NASDAQ:PARA). It surpassed its estimates of hitting 100 million users early and continued to grow its DTC segment, including ESPN and Hulu.

    The rollout of the Marvel Cinematic Universe (MCU) Phase 3 and 4 and the expansion of the Star Wars franchise with new shows have contributed to its wildfire growth. It also didn’t hurt that Verizon Communications (NYSE:VZ) users were getting free trials to try Disney+.

    It reached its heyday when shares peaked at $203.02, firing on all cylinders during the reopening on March 11, 2021, and then shares slid despite rising subscriptions. In its fiscal Q4 2022 earnings report, the Company reported subscriptions for Disney+ grew 39% YoY 164.2 million, HULU grew 8% to 47.2 million, and ESPN+ grew 42% to 24.3 million. Combined, its total DTC segment has over 230 million users worldwide.

    h2 Parks to the Rescue /h2

    Its Parks and Experiences segment has been carrying the profitability for the Company as pent-up demand exploded during the reopening. It made a profit of $1.5 billion to offset the (-$1.5 billion) losses from the DTC segment. However, many complaints have been about excessively high ticket prices due to inflationary and strong U.S. dollar headwinds.

    Disney shares have fallen back to pre-pandemic and pre-Disney+ levels giving back its premium from the streaming wars. This may present opportunities for patient investors waiting for a deep pullback in shares.

    h2 A Very Public Execution /h2
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    In an Apple (NASDAQ:AAPL) Steve Jobs-like return to the helm, Iger has been temporarily contracted for two years, moving back into the CEO position to implement a restructuring to return the Company and shares back to profitability. Over the course of his original tenure, DIS stock climbed 4X.

    The reasons for the unexpected and inconceivable replacement of CEO Bob Chapek over the course of a weekend are still unclear. Even more puzzling is that it happened less than six months after the Board renewed his contract for another three years. Perhaps some major behind-the-scenes politics was happening that warranted a shockingly quick and humiliating replacement of Bob Chapek.

    h2 Why Was Chapek Fired? /h2

    A major concern was the continuing operating losses for the DTC segment that led to missing analyst estimates for three of the past five quarters. Operating losses in its DTC segment doubled to $1.5 billion YoY in fiscal Q4 2022. Additionally, his political rhetoric and P.R. nightmare embracing a ‘woke’ agenda alienated board members, shareholders and customers.

    His public battle with FL. Governor Rick DeSantis over the Parental Rights in Education Act resulted in the stripping of its independent self-governing status by repealing the Reedy Creek Improvement Act of 1967. There have also been allegations of deceptive account practices to hide the actual losses of its streaming services but nothing public.

    h2 What’s Next? /h2

    Iger was the early architect of Disney+, launching it before he left in 2020. He was also responsible for acquiring Pixar, Marvel, Fox, and Lucasfilm during his tenure. He has made profitability at Disney+ a top priority as the measurement of success has shifted from growth to profitability by Wall Street.

    He will adjust the cost structure to put it on the path to profitability with less emphasis on growth and more on operating profits. Iger has kept the hiring freeze in place as he looks to restructure the Company. He is a dealmaker by heart based on his history of acquisitions and may predict more acquisitions or a possible sale in his latest tenure. Its Avatar: The Way of the Water movie passed the $1 billion mark at the worldwide box office in two weeks, making it the sixth movie to do so, which Disney produced four of.