Shares of the Walt Disney Co. (NYSE:DIS) have been a crushing disappointment since the heady days of the pandemic rally. After peaking at nearly $200 a share in March 2021, Disney stock has collapsed 60% and is today trading at the same level it was at 10 years ago.While some are pointing at the price hike in ticket prices as Disney parks, there is more to the story.
While the stock performance has been deflating and left shareholders fuming, there is reason for optimism with Disney stock. It will take time, but there are growing signs that the House of Mouse is on the road to recovery. From there, business and share price will rebound from their recent doldrums. What’s needed now is faith in CEO Bob Iger’s turnaround plan, and a little more patience on the part of stockholders.
Hulu and Legacy Media
Disney has several issues that it must resolve to win back the trust of both investors and analysts. Two of the biggest problems facing the company concern its traditional television stations, notably the ABC network. The second is the ownership structure of streaming service Hulu. Steps are being taken to address both issues. In recent days, it was announced that Disney has hired JPMorgan Chase (NYSE:JPM) to provide a fair value assessment for Hulu. Disney owns two-thirds of the streaming platform.The other third of Hulu is owned by Comcast (NASDAQ:CMCSA), which has hired its own bank to do an evaluation.
The value assessment comes as Disney prepares to buy Comcast’s 33% stake in Hulu that it doesn’t already own. This will effectively bring ownership of the streaming service under Disney’s roof. This is something analysts have been calling for since the House of Mouse bought the majority of Hulu back in 2019 for $71 billion. Once firmly under its control, Disney can either sell Hulu outright or further integrate it with its streaming services.
Hulu owns popular TV shows such as “The Bear” and “Only Murders In The Building,” and has nearly 50 million monthly subscribers. The move to gain 100% ownership of Hulu comes as Disney also entertains offers to sell its legacy media properties. Reports surfaced in mid-September that Disney is in talks to sell its TV assets that include the ABC network and National Geographic for as much as $10 billion. The traditional TV assets have been losing ground to streaming services and become a drag on Disney’s finances.
Rumors are also swarming that Disney is looking to sell its specialty sports network ESPN. Some analysts say this could earn it more than $50 billion. Disney has yet to make any announcements on any of these sales.
Raising Prices And Fending Off An Activist Shareholder
Another issue that has been vexing Disney and weighing on its share price is the profitability of its main Disney+ streaming service. Disney spent billions of dollars on content in an effort to attract consumers and drive subscriptions. From there, Disney+ has been left deep in the red and remains unprofitable. To help remedy this situation, Disney has been raising prices, and not just for access to its streaming services. The company has also announced plans to raise the prices it charges to access its theme parks.
On Oct. 13, Disney raised the price of its Disney+ streaming service to $13.99 per month for the premium tier. The company has also added a cheaper tier that features advertising. Additionally, the company is lifting prices for admission to its theme parks. At Disneyland in California, the price of the most expensive ticket for high-demand days has been increased by 8.4% to $194. A five-day pass costs $480, a 16% increase. The theme parks have been a bright spot for Disney, earning $28 billion in revenue in 2022, above pre-pandemic levels.
The price increases and other changes come as Disney fends off activist investor Nelson Peltz. Peltz recently increased his holding of DIS stock and is again pushing for a seat on the entertainment giant’s board of directors. Peltz’s Trian Fund Management now has a stake in Disney worth more than $2.5 billion. He is demanding multiple board seats at the company. Peltz first targeted Disney in January of this year, but ended his campaign after CEO Bob Iger outlined a $5.5 billion cost-cutting plan. Iger also announced 7,000 layoffs at the company.
However, with Disney stock continuing to perform poorly, Peltz is back and taking another run at management.
What’s Next for Disney Stock?
Clearly there is a lot going on at Walt Disney Co. these days. Other issues the company is grappling with include the ongoing strike by Hollywood actors and geopolitical uncertainties that could impact attendance at its parks around the world. However, the bottom line for investors is that change is afoot at the House of Mouse and the company is taking the right steps to streamline its business and get back on the right path. Disney has such a strong brand and so many valuable properties (Star Wars, Pixar, Marvel) that it would be foolish to count out the stock.
Long-term, DIS stock should be fine. Once Disney pulls the trigger on the deals it currently has in the works and it becomes clear that the company’s earnings are improving on both the top and bottom lines, the share price should rise substantially. The median price target on DIS stock among 27 professional analysts who track the company’s progress is $108.90, implying nearly 30% upside from current levels. It will take time, but the magic will return. DIS stock is a long-term buy.
On the date of publication, Joel Baglole held a long position in DIS. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
