Disney shares are trading sharply lower in early US price action today after reporting its fiscal second-quarter 2022 earnings. The shares have anyways been weak in 2022 amid controversy over the company’s opposition to Florida’s “Don’t Say Gay” bill.
The shares hit a 52-week low today and have continued their dismal run. The company has lost over a third of its market cap in 2022 and is underperforming the markets. What’s the forecast for Disney and should you buy the dip in the shares?
Key takeaways from Disney’s fiscal second-quarter earnings
Disney reported its fiscal second-quarter 2022 earnings yesterday after the markets closed. It reported revenues of $19.3 billion in the quarter, which was 23% higher than the corresponding period last year. The increase in revenues was primarily led by the rebound in the Parks segment which posted revenues of $6.7 billion, which were more than double of what it posted in the corresponding quarter last year.
In the first half of the fiscal year, the company’s revenues increased 29% to $41.06 billion. The increase in revenue came despite a $1 billion hit from the termination of a customer contract as the company would use the content on the streaming platform.
Streaming numbers were better than expected
Disney ended the quarter with 137.7 million Disney+ subscribers which were higher than the 135 million that analysts were expecting. The report was a welcome break for the streaming sector as Netflix has been battling a severe slowdown. It lost 200,000 subscribers in the first quarter of 2021 and expects to lose another 2 million subscribers in the current quarter. The shares had slumped after the earnings release and the company is the worst-performing FAANG share of 2022.
Disney’s also reported an increase in average subscription prices. The average revenue per subscriber in the US increased from $6.01 to $6.32 while the average international monthly subscription price increased from $5.14 to $6.35. This does not include the lower-priced Disney+ Hotstar subscription.
Commenting on the earnings, Disney’s CEO Bob Chapek said, “Our strong results in the second quarter, including fantastic performance at our domestic parks and continued growth of our streaming services—with 7.9 million Disney+ subscribers added in the quarter and total subscriptions across all our DTC offerings exceeding 205 million—once again proved that we are in a league of our own.”
Disney earnings miss estimates
Disney posted an adjusted EPS of $1.08 which was higher than what analysts were expecting. While the shares were trading higher in post-market price action yesterday, they are trading lower today as markets are apprehensive over the company’s outlook.
Analysts on earnings
Goldman Sachs reiterated its buy rating on Disney shares after the earnings report. It said, “We continue to expect Disney+ net adds subscriber momentum to improve in F2H22 vs. F1H22 driven by several new market launches (>50 in F3Q) and a ramp in both the pace and breadth of new content by F4Q.”
According to the forecast estimates compiled by CNN Business, Disney has a median price target of $162.50, which is a premium of 54% over current prices.
Of the 31 analysts covering the shares, 23 have rated the shares as a buy or higher, while the remaining eight analysts have a hold or equivalent rating on the shares. None of the analyst has a sell rating for the shares. While some analysts have lowered their target price in 2022, they have maintained their ratings. Most analysts see the dip in Disney shares as a buying opportunity.
Disney sees the total addressable market for streaming at 1.1 billion households across the globe. The company has outlined aggressive growth plans for its streaming business and expects Disney+ subscriber numbers to rise to between 230-260 million by the fiscal year 2024. After accounting for Hulu and ESPN+ subscribers, the company expects to have between 300-350 million subscribers by the end of 2024.
Meanwhile, during the earnings call, the company did not comment on the controversy in Florida where it risks losing its special status. None of the analysts also questioned the management on the issue.
Near term outlook looks cloudy
Disney’s CFO Christine McCarthy said that “At Disney+, while we still expect higher net adds in the second half of the year versus the first half, it’s worth mentioning that we did have a stronger-than-expected first half of the year.” She added, “Additionally, note that some of the Eastern European markets we’re launching in toward the end of Q3, including Poland, are in regions being impacted by geopolitical factors.”
She also alluded to the pull-forward of streaming subscribers. In response to an analyst question, McCarthy said “We still do expect an increase over the first half; however, the first half came in better than expected, so that delta that we had initially anticipated may not be as large. But we still do expect an increase in the second half to exceed the first half.”
Disney is also battling with higher costs including content production. The company has also been incurring higher costs towards expenses related to maintaining COVID-19 appropriate atmosphere at its Parks. However, it has been capitalizing the expenses related to the pandemic which would dent its profits in the coming years. While Hong Kong Park has reopened, Shanghai Park is still closed. The closures would also take a toll on the near term performance.
The shares trade at an NTM (next-12 months) PE multiple of just above 21x. The valuation multiples look quite attractive at these levels. Firstly, the Parks segment’s earnings are still depressed and secondly, the streaming business is yet to contribute to the earnings. Also, Disney has seen a valuation rerating and markets are valuing it as a streaming play.
Overall, at these price levels, Disney looks among the best shares to buy especially for long term investors.
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