Disney (NYSE:DIS) stock is down 27% year-to-date (YTD). To say the least, the market is not pleased with its earnings, especially its negative free cash flow. DIS stock probably won’t turn around until Disney can produce positive free cash flow. The market will be watching closely on May 11 when its Q2 earnings come out.
Last quarter Disney produced poor results, at least from a cash flow standpoint. Despite the fact that revenue was up 34% year-over-year (YoY). The company said its Q4 cash flow from operations (CFFO) was negative $209 million. But more alarming was the negative $1.19 billion free cash flow (FCF).
FCF is the amount of cash flow left over from CFFO after deducing capex spending. Both of these figures include net income, which was $1.15 billion. In other words, there was a huge cash outflow swing of $2.31 billion after SG&A costs. This outflow likely relates to huge spending on content by Disney.
The market knows this. It is not convinced that streaming revenue as a business model is really going to work. After all, Netflix (NASDAQ:NFLX) just reported a drop in its membership base and is warning of further drops.
Where This Leaves Investors in DIS Stock
Refinitiv has a survey of 14 analysts (on Yahoo Finance) showing that their average revenue forecast for Q1 is $19 billion. But this will be lower than the $21.8 billion in sales Disney made last quarter.
Investors probably won’t like this, since if its content spending stays level, it will lead to another cash outflow. FCF will likely be negative, and maybe even more so unless sales rise on a consecutive quarterly basis.
As a result, investors in DIS stock should be cautious here. If the company can’t show that it’s able to generate consistent positive free cash flow, the stock will keep falling. And given that Disney has still not brought back its dividend, investors are not getting paid to wait for a turnaround.
On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
