No fairytale earnings report for Disney as stock sells off

Disney reported a decent earnings report for last quarter on Tuesday, however, it fell short of high expectations and its stock price is selling off nearly 5% in the pre-market.

Revenues were $22.08bn, down a touch from the $22.1bn expected. Operating income was 17% higher than a year ago at $3.85bn, vs. $3.51bn expected. Hulu reported higher than expected subscriber figures, however, Disney + subscriber growth did not meet expectations, the total number of subscribers is now 153.6mn, analysts were expecting 155.66mn. In the cut-throat world of streaming, subscribers mean everything, and if you fall short on this metric, then it can put off investors, which may be the case on Tuesday. The Disney share price is currently pointing to a 4% decline when US markets open later today. This suggests that the market is unimpressed by Disney’s results. Bob Iger may have won the boardroom battle with Nelson Peltz, but not even higher future guidance for earnings -per – share was enough to stop the market selling Disney on the back of these results.

Some weakness on the horizon

The market may also be spooked by Disney’s comments about the current quarter’s entertainment results, which they expect to be softer than previously expected. The company has said that it expects its combined streaming business to be profitable in its Q4, however, this is not soon enough for the market, even if Disney + subscribers rose by 6 million in the previous quarter.

Why Disney’s share price is selling off

Expectations for Disney’s earnings were high, as the share price has risen by nearly 30% YTD. With a decent rally coming into these results, nothing less than perfection was acceptable to the market, as Iger and co. found out on Tuesday. Disney has been one of the top performing stocks on the S&P 500 this year, and this has boosted its P/E ratio, which is currently 32.5. This is higher than the average of its peers, which is 22.4. Disney’s dividend yield is also a mere 0.26%, below Paramount and Fox, and Disney did not offer any shareholder sweeteners with this earnings report. Thus, the market may think about ditching Disney in favor of cheaper options in the sector, even if some of Disney’s rivals are in a difficult position, for example Paramount.

Netflix, the King of streaming, is also expected to open lower on Tuesday. It has risen by 23% YTD, which is marginally lower than Disney. However, Netflix is singular in the streaming business because it is profitable. Disney is not, which may lead some investors to question its high valuation.  

Profitability across streaming services not expected until later in 2024

Overall, this earnings report beat expectations, which suggests that Bob Iger’s turnaround plan is working, added to this, Disney + and Hulu reported a $47mn profit, however the overall direct-to-consumer streaming business was not profitable and was weighed down by its sports service. The timing of future sports events is expected to drive the entire streaming business to profitability later this year, although the market has not been placated by this news on Tuesday.

The market may also be reacting to the lack of major film releases last quarter, due to the writers’ strike in Hollywood in 2023. There was no announcement of any future releases, which may have also hurt sentiment.

Disney: A victim of its own success

Overall, Disney’s results were not as bad as the sharp sell-off in the pre-market suggests. However, it is a victim of the run up in its share price YTD. These results don’t justify that move, and the market is now recalibrating. Even though the rally in markets is back on, this is not a tide that is lifting all stocks at the same time. As we mentioned, in the US, the market is favouring the top performing tech stocks, while other sectors’ scope for stock price gains may remain limited.