Stocks to buy

Get Ready for a Rebound in Disney (DIS) Stock

Disney’s (NYSE:DIS) financial performance has been a roller-coaster ride. While its third-quarter revenue for fiscal year 2023 saw 4% growth to reach $22.33 billion, it fell short of the estimated 4.8% growth to $22.53 billion. Disney’s adjusted earnings per share managed to surpass Wall Street’s expectations as cost-cutting initiatives start to show.

The stock has gone roundtrip, trading back to 2020 Covid-19 lows and may be stabilizing here. The question is when the time to buy DIS stock might be.

Source: Charts by TradingView

Cost-Cutting Initiatives Start to Save Disney

CEO Bob Iger has been instrumental in implementing cost-cutting initiatives, which have started to bear fruit. Iger stated, “In the eight months since my return, these important changes are creating a more cost-effective, coordinated, and streamlined approach to our operations.” This strategy has put Disney on track to exceed its initial goal of $5.5 billion in savings. It has also improved its direct-to-consumer operating income by roughly $1 billion in just three quarters.

Disney’s Parks, Experiences, and Products segment has been a significant revenue generator. This segment, which includes theme parks, resorts, certain merchandise licensing, and retailing activities, reported a 13% increase in revenue, amounting to $8.33 billion for the quarter. This growth contrasts with the shrinking media and entertainment segment.

Disney’s foray into the streaming business has been a focal point of its operations. Despite becoming one of the largest streaming companies globally in less than four years, Disney’s streaming service, Disney+, has seen a meaningful decline in subscriber numbers. The total number of Disney+ subscribers at the end of the quarter stood at 146.1 million, a 7.4% decline from the previous quarter.

The decline in total subscribers came primarily from its Disney+ Hotstar offering in India, which saw a 24% drop in subscribers. Notably, these are low-value subscribers, contributing only 59 cents per month in average revenue.

To boost financial performance, Disney has announced price hikes for its streaming services. It will also launch ad-supported tiers for Disney+ and Hulu in select European markets and Canada. Disney also plans to address the issue of password sharing, similar to the strategy deployed by Netflix (NASDAQ:NFLX). Iger stated that the company is actively exploring ways to address account sharing. Disney plans to update its subscriber agreements with additional terms on sharing policies.

One thing I personally like to see is debt reduction. Disney’s management succeeded in reducing its debt during the third quarter. Its net debt dropped from $38.12 billion at the end of the second quarter to $35.73 billion by the end of the third quarter, a decline of $2.39 billion. While this is positive, it’s still a question if DIS stock is properly valued now.

The Bottom Line on DIS Stock

What’s the bottom line here? Disney’s third-quarter performance was a mixed bag, with revenue falling short of expectations and a decrease in Disney+ subscribers. However, the impact of cost-cutting initiatives was clearly visible in the form of robust cash flows and debt reduction. Despite the decline in total Disney+ subscribers, the company consistently grew in its core, high-value markets.

Disney’s brand will never die. And neither will animal spirits from those looking to buy a beaten-down blue-chip name. To me, DIS stock could see a solid rebound from these levels, assuming we don’t experience a meaningful recession over the next year or two.

On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

The Lead-Lag Report is provided by Lead-Lag Publishing, LLC. All opinions and views mentioned in this report constitute our judgments as of the date of writing and are subject to change at any time. Information within this material is not intended to be used as a primary basis for investment decisions and should also not be construed as advice meeting the particular investment needs of any individual investor. Trading signals produced by the Lead-Lag Report are independent of other services provided by Lead-Lag Publishing, LLC or its affiliates, and positioning of accounts under their management may differ. Please remember that investing involves risk, including loss of principal, and past performance may not be indicative of future results. Lead-Lag Publishing, LLC, its members, officers, directors and employees expressly disclaim all liability in respect to actions taken based on any or all of the information on this writing.

Michael A. Gayed is the Publisher of The Lead-Lag Report, and Portfolio Manager at Tidal Financial Group, an investment management company specializing in ETF-focused research, investment strategies and services designed for financial advisors, RIAs, family offices and investment managers.

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