While the broader stock market rebounded from a rough 2022 this year, the opposite held true for Walt Disney (DIS -0.12%) shares. The stock has been on a downward trend in 2023, hitting a 52-week low on Sept. 7, an ignominious result during the company's 100th year in business.
The entertainment giant's share-price decline makes sense. Disney faces an extraordinary number of challenges in 2023.
Disputes with cable company Charter Communications and the state of Florida rage on while a pair of industry strikes from writers and actors put a halt on the creation of new content. Then there's the lack of profitability at its Disney+ streaming service and the decline of its traditional linear television business. That's a long list of problems in Disney's lap right now.
Naturally, investors might shy away from buying Disney shares given the current situation. But if you look beyond the company's short-term headaches and focus on the long term, the situation starts to appear quite different. After all, there's a reason why Disney has lasted 100 years.
Disney's intellectual property power
Given the short-term headwinds Disney faces, it's understandably hard to see the long-term picture. The company's linear TV business, such as its ABC network, is under pressure financially in the face of streaming services, and newer entertainment rivals such as Netflix. As CEO Bob Iger noted, the "trends being fueled by cord cutting are unmistakable."
But Disney is capable of successfully navigating these industry transformations thanks to its copious collection of beloved characters and brands making up Disney's intellectual properties. From Mickey Mouse to Marvel Comics, Disney's icons are known the world over. That's why Iger noted the company's businesses that "will drive the greatest growth and value creation over the next 5 years ... are inextricably linked to our brands and franchises."
These brands are unique assets with loyal fans, capable of generating multiple streams of revenue. For example, Avatar: The Way of Water is the third-highest-grossing film of all time. It's also expected to become Disney's biggest domestic digital home video release. And in the future, an Avatar-themed experience will be added to the Disneyland theme park.
Disney's profits come from more than just movies
As the Avatar film demonstrates, these brands are not only the heart of the company's movie empire, they generate ongoing revenue outside the box office. Toys, clothes, and other merchandise sales, licensing deals, and content to lure customers to the company's streaming services and theme parks are just some of the ways Disney capitalizes on the potent appeal of its brands.
This non-film part of Disney's business, called its Disney Parks, Experiences and Products segment, enjoyed strong revenue growth in 2023. In the company's fiscal third quarter, ended July 1, this division brought in $8.3 billion in revenue compared to $7.4 billion in 2022, a 13% increase.
Moreover, the division's fiscal Q3 operating income of $2.4 billion was more than double the $1.1 billion produced by its film and television arm, grouped under its Disney Media and Entertainment Distribution division. After three quarters, the Disney Parks, Experiences and Products segment produced $7.6 billion in profits compared to the Media and Entertainment Distribution division's $2.2 billion, showcasing the importance of these additional revenue streams.
Disney's film empire is certainly no slouch. The company's Media and Entertainment Distribution division generated $14 billion in fiscal Q3 revenue, nearly 70% more than the Parks, Experiences and Products segment. Yet one of the reasons this division's operating income is low is because the Disney+ streaming service isn't profitable. That's why the company has committed to achieving Disney+ profitability by the end of the next fiscal year. Disney has already improved operating income for its direct-to-consumer streaming operations by $1 billion this year.
To buy or not to buy Disney shares?
Disney's fiscal 2023 shows the company is moving in a positive direction. The company cut costs over recent months and is on track to save more than $5.5 billion. Its Disney Parks, Experiences and Products segment appears to have recovered from the lost revenue due to lockdowns caused by the COVID-19 pandemic, as its $24.8 billion in revenue over three quarters is nearly 30% higher than 2019's pre-pandemic $19.6 billion.
Its cost cuts and push toward Disney+ profitability should boost the company's ability to generate free cash flow (FCF). In fact, Disney's FCF is already looking healthy again as it reached $1.6 billion in fiscal Q3 compared to $187 million the prior-year quarter. As a result, the company is looking to reinstate its dividend, although timing is still to be determined.
All of these factors are encouraging, and Disney's current troubles will pass. So with the stock hovering near a 52-week low of $79.75 at the time of this writing, the lowest price in nine years, now looks like a good time to buy Disney shares.
Robert Izquierdo has positions in Walt Disney. The Motley Fool has positions in and recommends Netflix and Walt Disney. The Motley Fool has a disclosure policy.
