Walt Disney Q2 Earnings: Don’t Underestimate This Stock (NYSE:DIS)
After the market closed on Wednesday May 11 this year, the management team of The Walt Disney Company (NYSE: DIS) is expected to release financial results covering the second quarter of the company’s 2022 financial year. While every quarter is important to a business, it would be fair to say that there is more at stake this quarter than in most typical quarters. This is because there is a lot of pessimism surrounding the company and its future prospects. Investors are worried about a slowdown in streaming, and they’re concerned about the impact of continued closures at some of the company’s parks around the world in response to persistent COVID infection rates. While these are legitimate concerns, the company’s overall picture would likely be attractive in the long run. But of course, we’ll see soon whether that turns out to be true or not. Regardless of the outcome, investors would be wise to watch a few key developments closely ahead of the earnings release.
Keep an eye on the stream
One of the biggest concerns about The Walt Disney Company and its prospects right now is streaming. After all, it was the rapid adoption of the company’s leading streaming service, Disney+, that was responsible for sending shares above $200 last year. Today, as of this writing, the stock is trading at just $110.29. This year alone, stocks are down 28.8%. And since their 52-week high, they have fallen 41.2%. The company’s biggest concern seems to come from its rival netflix (NFLX). In its latest financial documents, it revealed a drop of 0.2 million subscribers on its platform. Although to be fair, had it not been for the company’s decision to cease operations in Russia, it would have reported an increase in subscribers. But that’s less significant than the fact that management expected an additional 2 million subscribers exiting its platform in what is currently the current quarter.
From the end of his last trimestre, The Walt Disney Company had 129.8 million subscribers on Disney+. While that’s impressive, investors are betting on the company to reach the 230 million to 260 million global subscribers that the company used to be. forecast it would have done so by the end of 2024. To hit the low end of that range, the company would need to add an average of about 9.1 million subscribers each quarter by then. So far, that doesn’t seem to be too much of a problem. In the last quarter alone, the company’s subscriber count grew by 11.7 million from what the company had a quarter earlier. As for those worried about flooding the market, the fact is, as I’ve pointed out before, Netflix is one of the most expensive streamers out there and it lacks the kind of resources that big companies of content like The Walt Disney Company has. So, personally, I think fears about The Walt Disney Company’s streaming prospects are overblown right now. Instead, I think investors are unjustifiably projecting the harsh reality affecting Netflix onto a company that has a much better value proposition for its users.
Either way, it’s very important for investors to keep an eye on the number of Disney+ subscribers. However, they should also continue to closely monitor the number of subscribers to the company’s other two main streaming services. Sequentially over the past quarter, ESPN+ has therefore increased its subscriber count by 4.2 million, reaching the 21.3 million it had at the end of the last quarter. Meanwhile, the number of Hulu subscribers grew by 1.5 million to reach 45.3 million at the end of the last quarter. These are also an important part of the value proposition surrounding The Walt Disney Company as a whole. On top of that, investors would also be wise to keep a close eye on prices. Year-over-year in the last quarter, The Walt Disney Company saw Disney+ prices increase by 9.4%. For ESPN+ and Hulu, those increases were 15.2% and 1%, respectively. It would be a particularly positive sign if prices increased as the number of subscribers increased. But if the opposite happens, it could mean broader market weakness.
Walt Disney’s Debt and Cash Flow Will Be Significant
Investors should also pay attention to certain fundamentals like debt and cash flow. I was surprised when in the first quarter of this year the company reported net debt of $39.69 billion. This represented a quarter-over-quarter increase of $1.24 billion. It was also the first time in a year that debt increased sequentially. Of course, this correlates well with operating cash flow. In the first quarter of the year, the company generated a net cash outflow of $209 million. This compared to the $75 million inflow reported in the same quarter a year earlier. But to be fair, had we ignored changes in working capital, cash flow would have jumped year-over-year from $2.14 billion in the first quarter of 2021 to $4.47 billion. dollars at the same time this year. As for the second quarter of last year, the company recorded a net inflow of $1.47 billion. Adjusted for changes in working capital, that figure would have been $1.84 billion.
Parks deserve special attention
One of the biggest issues for The Walt Disney Company during the pandemic involved the company’s theme parks and other in-person assets. For the most part, the world has now largely brought COVID under control and has reopened after a difficult few years. But this has not been the case everywhere. Disneyland in Shanghai, for example, remain closed for the moment. And the company’s theme park in Hong Kong only just opened April 21. China continues to take COVID very seriously, employing some of the most restrictive responses to the pandemic of any country on the planet. While this may save lives, there is no denying that it will negatively impact businesses like this.
Even then, the Parks and Experiences portion of The Walt Disney Company may work well. In the first quarter of 2022, for example, revenue associated with these activities amounted to $5.66 billion. That compared to the $1.87 billion reported a year earlier. Operating profit also improved from a negative $1.06 billion in the first quarter of 2021 to $1.58 billion in the first quarter of this year. Much of this improvement is the result of the company’s domestic operations. Profits fell from negative $798 million to $1.56 billion. This compares to the company’s international operations going from negative $262 million to positive $21 million. For the second quarter of last year, revenue was stronger than the first, with a total reading of $2 billion. The company still generated a loss that quarter, amounting to $967 million. In the domestic market, the loss was $587 million, while in the international market, it was $380 million. The type of participant numbers and revenue reported by the company will have a big impact on how investors view the company’s future prospects.
Right now, investors are incredibly bearish on The Walt Disney Company. I understand why due to the pessimism surrounding both streaming and a recovery from the COVID-19 pandemic. Although not otherwise mentioned in my article, some investors may point out the political issues the company is having in Florida. But I see it more as a sideshow that should have limited, if any, impact on the business. In fact, between the debt picture and the cash outflows the company is already paying, the company may be nothing in the grand scheme of things as a result of deviant political maneuvering. At the same time, this is a high quality company that would likely continue to grow well in the long term. That’s why, in my hyper-focused portfolio, I’ve included the company. Admittedly, it is the smallest of my five farms. But my willingness to keep it in my portfolio and continue to build the position as its stock price declines speaks to my optimism about the company’s future.