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3 Reasons to Watch Disney Stock Next Week

Shares of The Walt Disney Company (NYSE: DIS) are due for some volatility over the next week. The entertainment juggernaut will announce fiscal Q3 results after the market closes on Wednesday, Aug. 10, and expectations are muted heading into that report.

The last quarterly update surprised investors by showing weakening earnings trends in the new streaming business. Wall Street wasn't pleased to see that segment hemorrhage cash, even though subscriber growth remained strong.

Shareholders will be watching the Disney+ update for signs that the segment can deliver sustainably growing profits. But there are some other good reasons to follow that release on Wednesday, too. Let's dive right in.

1. Following Netflix or Roku?

The video-streaming industry is hard to judge right now thanks to major shifts happening in consumer preferences and advertising spending. Sure, Netflix recently projected a quick return to subscriber growth after membership gains beat expectations in the second quarter. But Roku sounded a different tone as it lowered its 2022 outlook.

There's room for Disney to blaze its own path here, thanks to its mix of advertising and subscription-based revenue in Disney+, ESPN+, and Hulu. But it will still be interesting to see whether membership growth continues at a robust pace. Paid memberships in the core service rose 28% in Q1 and average monthly prices jumped 13%.

2. Spending cash

Disney's pivot toward a more direct relationship with its content fans has created big short-term losses that help explain why the stock is underperforming in 2022. The streaming business shed cash over the last six months, dragging the company's overall profitability down to just 8% compared to a high of over 20% in 2019.

Investors are right to worry about when that pivot will start paying off for the business. Yes, it has been encouraging to see subscriber growth paired with rising monthly membership prices. But Disney needs more success on these scores, along with slowing content spending, before the direct streaming platform can start contributing cash to the wider business.

3. Price sensitivity

Disney's parks and resorts segment was built for this moment. Consumers are prioritizing in-person entertainment and are spending freely in areas like vacations after shunning these categories for nearly two years. You could see evidence of those trends throughout Disney's Q2 results, which showed higher attendance, rising ticket prices, and increased spending in the parks.

The Q3 results will test that bullish thesis by adding a few new pressures on consumers, like accelerating inflation and rising gas prices. Retailers have warned that spending slowed in recent weeks, and Wednesday's report will show whether Disney was able to buck that trend by continuing to increase prices at a faster rate than expenses.

But even if Disney executives make cautious comments about the rest of 2022, that's no reason to abandon the stock. Yes, two expensive moves over the last few years -- the pivot toward streaming and the acquisition of the Fox studio assets -- have made Disney seem much less financially strong. The pandemic amplified those weaknesses by temporarily reducing demand in parks and cruise ships.

But Disney has a good shot at extracting value from those bold bets, even if it takes a few more quarters before those benefits become clear.

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Demitri Kalogeropoulos has positions in Netflix and Walt Disney. The Motley Fool has positions in and recommends Netflix, Roku, and Walt Disney. The Motley Fool recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.


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