Disney Stock Outlook: New CEO, New Deals, New Streaming Strategy

Key Takeaways

• In the past few weeks, previous CEO Bob Iger reclaimed his position from outgoing CEO Bob Chapek.
• Though the company faces declining park profitability and losses from streaming, many are hopeful Iger can return the company to its former growth trajectory.
• To cement that point, Disney Streaming announced a new deal for the remaining 15% of BAMTECH Media at a $6B valuation. Does this hint at a Hulu/Comcast deal to follow?

Between its theme parks, streaming services, movie studios and ownership of major television networks, Disney is an entertainment behemoth that is nearly unbeatable. The company has experienced some much-needed turbulence over the past few weeks.

The biggest Disney-related news in the last month is that former CEO Bob Iger has replaced now-former CEO Bob Chapek, who took the reigns in February 2020 and never actually formed a strategy for streaming beyond, perhaps, a plan to lose less. Since Disney had recently extended Chapek’s contract through 2025, this change came as a surprise.

How will this upheaval impact Disney in the long run, and is the company a better investment than it was? Here’s what investors need to know.

A brief history

Bolstered by the success of an animated short film he’d released in 1923, Alice’s Wonderland, Walt Disney signed a contract to produce more animated short films. He moved to Hollywood, where his brother Roy lived, and together they co-founded Disney Brothers Cartoon Studio.

Over the next decade, the company built a physical studio, released multiple animated films, and developed the character of Mickey Mouse, who first appeared in 1928 and serves as the company’s mascot to this day.

The company experienced a golden age starting with the release of a full-length film, Snow White and the Seven Dwarves in 1934. Soon after, Disney was forced to deal with a slew of challenges, including an animators’ strike and World War II.

After the war, Disney ventured into live-action film and television. The company’s first theme park opened in 1955. Planning also began for Walt Disney World in Florida. Walt Disney died in 1966, and his brother Roy took over the business.

Under Roy’s management, Disney focused on live-action films. After he died in 1971, the company continued to fare well until the 1980s, when profits slowed.

Michael Eisner joined as CEO in 1984. Under his management, the business went through a renaissance. It produced successful animated and live-action films, joined the Dow Jones Industrial average, grew its TV presence and theme park brands, and acquired major franchises and brands, including the Muppets.

Bob Iger took over as CEO in 2005, and he continued the company’s growth by acquiring Pixar, Marvel, LucasFilm and 20th Century Studios as well as starting a streaming service, Disney+ and holding a majority stake in Hulu.

From the time Iger took the helm to the time he left in 2020, Disney’s stock more than quadrupled in value.

What’s happening now?

When Bob Iger left Disney in 2020, he was replaced by Bob Chapek, a Disney veteran of 18 years and chairman of Disney Parks, Experiences and Products.

Chapek faced major challenges, including the COVID-19 pandemic. In the second quarter of 2020, the company reported a $1.4 billion loss, with earnings down 91%. Disney continued experiencing significant losses and ultimately laid off 32,000 park employees.

As the pandemic receded, the troubles did not end. Disney was criticized for how it treated its park employees and its response to Florida’s “Don’t Say Gay” bill. It even faced an employee walkout.

In early November, the company reported its earnings had missed expectations, earning $20.15 billion instead of the expected $21.24 billion. That, combined with the company’s other struggles, led to Bob Iger taking back the position of CEO for a term of two years.

Iger’s goal during this time is to develop a strategy for renewed growth and find another successor. Disney Streaming just announced a deal to buy out the remaining 15% of BAMTECH Media for $900 million at a valuation of $6 billion and signaling it’s bigger, better, faster streaming strategy to come.

Streaming trends

Disney is a major player in the streaming space, owning Disney+, ESPN+ and a majority stake in Hulu.

Streaming has been a massive area of growth for the company, though still an underperforming arm of the business by any measure, especially on a global scale. In its earnings report, Disney noted that it added 14.6 million subscribers to the services, which brought its total number of subscribers to 236 million. Disney+ alone has 164 million subscribers.

For comparison, Netflix, which has a much longer history than Disney+, has 223 million subscribers. But Disney is still firmly in the growth phase with its streaming services. The company is losing money to the tune of $1.5 billion on these services due to production, technology and marketing costs. This past quarter also lacked premium releases on Disney+.

If the company can continue to grow its streaming subscribers at its current pace, there’s a good chance it can begin to turn a profit soon. Before his departure, Chapek said he hoped for Disney+ to achieve profitability by 2024 due to a growth in subscriber numbers and the addition of a cheaper, ad-supported subscription tier. To say this announcement is underwhelming for a company as driven and innovative as Disney, would be an understatement. Disney must have a strategy for streaming that is nothing short of dominance on the global stage, especially given its various underutilized pieces with Hulu, Fox, etc.

Parks and Holidays

Disney’s theme parks took a major hit because of COVID-19 but have steadily recovered as the pandemic receded.

However, there are warning signs in the Parks division. Though it brought in $7.42 billion in the previous quarter, an increase of 36% since 2021, profit margins were far from projections, landing at 14.8% against the anticipated 20%.

While the parks are profitable, missing by that large a margin is cause for investors to worry, and they did. As the parks recover from the pandemic, these numbers indicate that there is a significant mismatch between park revenue and expenses. With a potential recession on the horizon, that mismatch could grow as revenues begin to shrink.

Holidays tend to be a busy time for Disney since families head to the park and purchase gifts, making it a prime opportunity for the company to boost revenues and earnings. Investors will likely keep a close eye on the company’s results during the holidays.

What it means for investors

Investors seemed happy about the news of Bob Iger’s return, with the company’s stock jumping on the day he accepted the role of CEO. However, this comes after a major decline under Chapek’s leadership, which saw shares fall more than 50% from a high of more than $197. Disney stock closed at $94.69 yesterday, November 29, 2022 – down nearly 40% year to date.

Disney is likely to prove a great buy at current prices. During his previous tenure as CEO, Disney grew significantly and saw its stock price quadruple.

Disney could continue to lose money on its streaming service as it tries to compete in an increasingly crowded market. An oncoming recession could also worsen its parks’ performance, dropping profit margins or even turning them into a cost rather than a profit center.

Investors will have to consider whether they believe in Iger’s leadership as well as his ability to navigate an increasingly complicated economy and entertainment industry.

The bottom line

Many fans are excited about Bob Iger’s return to Disney’s top position and feel he’ll be able to lead Disney to success. However, investors will need to consider whether they believe in his leadership enough to invest.

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