Disney’s (NYSE: DIS) stock price fell as much as 6% on Wednesday after the company missed revenue and earnings forecasts for the third quarter. Revenue came in 5% below estimates, but EPS fell 59% and were 20% below analyst forecasts due to increased investments related to Disney+, Hulu and ESPN. However, the company also announced it will be launching a competitively priced streaming bundle including all three content channels.
The earnings miss shouldn’t really surprise investors. In April we pointed out that Disney’s earnings would come under pressure in the next few years. Not only is the company having to spend money building its streaming platform, but it also has to service debt related to the acquisition of 21st Century Fox.
Revenue Miss Due to Lower Park Attendance
Third-quarter revenue grew by 32.9% to $20.24 billion including contributions from Fox and Hulu. This was about $1 billion lower than expected as park attendance was lower than expected after the new Star Wars theme park opened. It appears visitors postponed visiting the park in anticipation of large crowds, and attendance may well increase over the next year.
GAAP EPS came in at $0.79, down 59% from a year ago and $0.66 below estimates. Free cash flow also slipped into negative territory, falling to -$2.93 billion from + $2.46 billion last year.
The Media Networks segment generated revenue of $6.71 billion which was up 21%. The Parks, Experiences and Products segment grew sales 7% to $6.6 billion. Studio Entertainment generated $3.84 billion, up 33% on the back of several successful movie releases and record box office sales.
The Direct-to-Consumer and International segment managed to grow sales 360% to $3.86 billion, including revenue from new acquisitions. However, this segment also ended the quarter with a $553 million loss due to costs associated with consolidating Hulu and ramping up investment in ESPN and Disney+.
CEO Bob Iger expressed disappointment with the results from the Fox studio assets that Disney acquired in March. He also announced that in addition to the standard Disney+ $6.99 subscription package, a bundled package including Disney+, Hulu and ESPN would be available for $12.99 per month. Disney+ is scheduled to launch in November.
Investors Will Give the Company a Pass This Time Around
Investors will probably give Disney a pass for these results. The revenue miss was narrow, and while the earnings miss was substantial it can be justified by the increased investment in the streaming business.
The announcement of the streaming bundle with ESP and Hulu is also being viewed as positive. This bundle is priced in line with Netflix and Amazon’s subscriptions but offers consumers a far wider variety of content.
Disney is an excellent company with diversified revenue streams and a very strong moat. At the right price, it probably belongs in every long-term investor’s portfolio. So, what is the right price to buy Disney?
Better Opportunities Ahead?
Some analysts believe Disney deserves a higher multiple now that it is entering the streaming business. Disney trades on a forward multiple of about 22, while Netflix trades on a forward multiple of 94 and struggles to turn a profit. That’s probably true, though it will be a while before the streaming business contributes meaningfully to Disney’s bottom line.
There’s also a fairly good chance long-term investors will get a chance to buy Disney at a better price. There’s a strong case to be made that the tech sector is now in a bubble with numerous loss-making businesses trading on very high multiples. With Disney’s entry into the streaming business, it will now be lumped in with the sector. We are also likely to see further deterioration in Disney’s margins as it continues to invest in the streaming business. And, it’s inevitable that a price war will begin between streaming businesses, led by Amazon and Apple which can afford to cut prices to grow market share. Any one of these scenarios could lead to Disney trading lower in the next year or two.
In the short-term Disney’s stock price will track broad market sentiment. In the longer-term investors may well get a better opportunity as competition heats up and margins come down.
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