Disney's Post-Earnings Drop: Don’t Be Dismayed by the Dips, Brighter Days Are Ahead

The earnings report for Disney shows the company's revenue at $22.08 billion, marking a 1% year-over-year increase, which is slightly below the expected $22.11 billion. Earnings per share (EPS) stood at $1.21, surpassing the forecast of $1.10. Notably, Disney has now separated the reporting of its ESPN sports business.

Revenue from theme parks reached $8.39 billion, exceeding expectations of $8.18 billion and representing a 10% increase year-over-year. The entertainment business, including streaming services, brought in $9.8 billion in revenue, falling short of the anticipated $9.99 billion and declining by 5% compared to the previous year. The sports segment generated $4.31 billion, which was slightly below the forecasted $4.33 billion but still showed a 2% increase.

A key area of focus is the streaming services, which Wall Street is closely monitoring. Streaming revenue was $5.64 billion, up 13% year-over-year. More importantly, the segment has started to turn a profit, with an operating income of $47 million for the quarter, finally moving from loss to profit. However, it's important to note that these figures do not include ESPN+. If factored in, the entire streaming division would show a loss of $18 million, but it's nearly breaking even. The company had initially planned to reach profitability by the third quarter of this year, but the current trend suggests it might achieve this goal ahead of schedule. In terms of subscribers, Disney+ counts 153 million, slightly below the expected 155 million, while total platform subscribers are at 229 million, meeting projections.

The most significant factor driving the stock price down post-earnings is the guidance provided, particularly for theme parks. The company has raised its full-year EPS growth guidance to 25% from the previous 20%, following an exceptional performance this quarter. It expects to generate operating cash flow of $14 billion and free cash flow of over $8 billion for the fiscal year. However, the guidance also indicates that next quarter's operating profit for theme parks will be essentially flat compared to last year, implying zero growth, whereas Wall Street was expecting double-digit growth. During the earnings call, the company also mentioned rising salary costs and expenses associated with launching new ventures, such as new cruise ships and parks.

Overall, although Disney's numbers fell slightly short of expectations, the company is trending positively, which should be comforting to long-term investors. A weaker quarterly guidance cannot overshadow Disney's long-term growth trajectory. For the short-term outlook of Q3, we might still see some fluctuations. However, looking ahead to Q4 FY24, with multiple Marvel movies scheduled for release, a low base for park business, cable television poised to benefit from election-period viewership, and the potential increase in political advertising, there's a higher certainty of an overall revenue rebound.

Disney still has the potential to return to a valuation of $230 billion. Currently, the market cap has adjusted to $190 billion, which is a significant recovery from the previously anticipated bottom valuation of $150 billion. Consequently, the potential for upside appears smaller in comparison. Nonetheless, even at the current stock price, I believe the likelihood of an upward trend is greater.