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Shares of Walt Disney (DIS 0.83%) are down 39.8% since the S&P 500 market index peaked on Jan. 3, 2022, according to data from S&P Global Market Intelligence. Let’s see why the entertainment titan crashed so hard last year and whether the House of Mouse can recover from this painful price cut.
Disney’s 2022 downturn started in January. When media-streaming rival Netflix (NFLX 3.92%) reported weak fourth-quarter results and suggested that its ever-skyrocketing subscriber count might shrink later in the year, some investors saw red flags for the streaming media sector as a whole. Disney’s stock fell 6.9% that day.
The next Netflix report three months later did nothing to alleviate investor concerns about the streaming industry’s general health, and its subscriber roll actually did grow shorter in the first quarter of 2022. Disney’s shares took another 5.6% drubbing on the news.
Hit fast-forward for another three months to arrive at Netflix’s second-quarter report. This time, the company lost nearly 1 million subscribers, but investors cheered because guidance had suggested 2 million lost accounts.
Furthermore, management said that the subscriber count should increase again in October’s third-quarter update. Disney’s investors embraced the streaming rival’s signs of life, driving the entertainment conglomerate’s shares 8% higher in two days.
But that wasn’t the end of Disney’s troubles. Nov. 9 showed the largest single-day price drop of the whole year, driven by Disney’s own fourth-quarter report. The company added 14.6 million net new streaming subscribers, with some overlap since many viewers subscribe to two or more of its Disney+, ESPN+, and Hulu services.
However, that big subscriber jump was achieved through costly spending on marketing and content, resulting in a net operating loss of $1.5 billion for the direct-to-consumer division. Bob Chapek, Disney’s CEO at the time, promised to cut costs and boost profitability, but many investors still hit their sell buttons. Disney’s stock took a 13.7% haircut that day.
As you can see, Disney investors are paying close attention to the company’s place in the video-streaming industry, and to the overall health of that sector. I’m here to talk about Disney’s disappointing year, but an accurate description requires focusing on Netflix for the most part.
That wasn’t the whole story, of course. Coronavirus mutations closed theme parks for a while, dividend payouts are still on hold, some movies bombed at the box office, and Bob Iger reclaimed the CEO title from Bob Chapek in November. Still, the Netflix saga triggered the sharpest price cuts of the year (and one of the highest jumps).
I expect the two stocks to remain closely correlated in 2023. Disney’s shift from silver screens to streaming comes with massive structural changes and full budget support, and the company needs to get it right.
On the upside, Bob Iger is a proven winner who is quite likely to get Disney’s operations back on track. The next step is to figure out how it can grow the streaming business without burning too much cash in the process.
As a longtime shareholder of both Netflix and Disney, I felt the torment of last year’s price moves but also treated the low share prices as an opportunity to buy more shares. The two streaming giants are still dramatically undervalued in my eyes, so it’s not too late to pick up some Disney stock on the cheap today.
Anders Bylund has positions in Netflix and Walt Disney. The Motley Fool has positions in and recommends Netflix 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.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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