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It’s the time of year when analysts become fortune tellers. Things didn’t work out so well for me last time in forecasting what was in store for the House of Mouse. Half of my Walt Disney (DIS 3.58%) predictions for 2022 failed miserably. Bob Chapek didn’t hold on to his CEO post. Disney shares also failed to move higher.
I was right on the other two Disney calls. The media giant didn’t restore its dividend in 2022. Disney World’s highly anticipated Tron-themed rollercoaster also failed to open this year.
Let’s try this again. Here are a few predictions I have for Disney as an investment and a business. Let’s see if I fare better than 50/50 this time.
Image source: Disney.
Disney’s streaming service has been a speedster. It has amassed 164.2 million global subscribers in just three years. The problem is that it’s a money pit. Disney’s consumer-direct segment that is anchored by Disney+ posted an operating loss of almost $1.5 billion in its latest quarter.
There are two obvious ways to improve the situation. Disney can stop investing in content, helping rein in costs. The other is to get its viewers to pay more. Disney chose the latter earlier this month.
Subscribers wanting to stick with the original ad-free version of the service have now started to pay $10.99 a month, a 38% increase. It’s a big hike, and switching costs are low and churn is high in this niche. I still think Disney will find a way to serve streaming content to more than 164.2 million Disney+ homes a year from now.
A big price increase in December is a problematic look. If the current economic funk widens in 2023 folks will likely pare back on their premium streaming subscriptions. I still like Disney’s chances here. Disney’s price hike also came with the introduction an ad-supported version of its platform at the previous $7.99 price point of the ad-free version.
Cost-conscious customers have taken advantage of downgrading to advertising-backed options in the past. Most of Disney’s Hulu+ subscribers are on the cheaper plan with brief commercial interruptions. I feel that Disney+ will continue to win over fans of the iconic brand in family entertainment.
This was the call that burned me last time. When Disney shares dipped 15% in 2021 I figured it was due for a bounce. Would an iconic brand in entertainment really slide in back-to-back years during a recovery from pandemic lows?
“Hold my mouse ears,” said 2022, as the stock has plummeted 46% with two trading days to go. Disney’s market cap has been cut nearly in half despite what in many ways was a successful year:
It’s a wild scenario for a decline, much less one of the stock’s worst years ever. The deficit did widen at Disney+, and the foggy economic outlook could hurt the media stock bellwether in fiscal 2023. I still like Disney’s chances to bounce back as an investment in the year ahead. Buying Disney for 20 times this new fiscal year’s profit target and less than 16 times next fiscal year’s earnings estimates sounds pretty good right now.
It stunned Disney enthusiasts — in a good way — when Disney announced that Bob Iger would be returning as CEO five weeks ago. The stock initially popped on the news, but the gains didn’t last. The stock hit another multiyear low on Wednesday.
Iger’s arrival came with a short wick. He’s only going to be CEO for two years. He has no interest in recreating his 15-year tenure the last time he was the big cheese at the House of Mouse. However, even that run came with retirement deadlines that came and went, ending in contract extensions to continue his leadership.
It’s becoming clear that two years won’t be enough to turn Disney’s fortunes around. He dealt Bob Chapek a bad hand by leaving just as the COVID-19 crisis would challenge Disney’s various businesses. He won’t do that again to whoever gets tapped to replace him now. My last Disney prediction is that Disney will add at least a short extension to his second CEO run.
I’m not taking much of a stand with this call. Many have argued that he will continue to lead Disney beyond late 2024. However, this prediction is that he will work out a longer contract at some point in 2023, just halfway through his initial deal. Leaving with the job far from done would be detrimental to his legacy and his chances for potential political pursuits. If he’s going to do this challenging job correctly it will take more than half a presidential term.
Rick Munarriz has positions in Walt Disney. The Motley Fool has positions in and recommends 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.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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