Disney Stock Falls Despite Earnings Beat: Here’s Why

Disney stock (NYSE: DIS) is trading lower in early US price action today despite the company reporting better-than-expected earnings and raising its guidance. Here’s what spooked markets despite a beat on headline numbers.

Disney released its fiscal Q3 2024 earnings today before the bell. The company’s revenues rose 4% YoY to $23.16 billion and were ahead of the $23.07 billion that analysts were expecting. Its adjusted EPS rose 35% to $1.39 and easily surpassed the $1.19 that analysts predicted.

Disney Stock Falls Despite Earnings Beat

The company also raised its full-year guidance and now expects its adjusted EPS to rise 30% YoY in the fiscal year as compared to the previous guidance of 25%. Importantly, Disney’s streaming business turned profitable during the quarter which is no mean achievement as the segment’s operating loss peaked at almost $1.47 billion in the final quarter of fiscal year 2022.

“This was a strong quarter for Disney, driven by excellent results in our Entertainment segment both at the box office and in DTC, as we achieved profitability across our combined streaming businesses for the first time and a quarter ahead of our previous guidance,” said CEO Bob Iger in his prepared remarkṣ.

Even since Iger took over as Disney’s CEO in late 2022 he has been working on cost cuts and streaming profitability and these efforts seem to be paying off looking at the strong growth in Disney’s earnings.

Parks Could Be the New Worry for Disney

While Disney’s streaming business continues to show incremental improvement in performance, especially on the bottomline, the Parks segment – which generates most of the profits for Disney – seems to be a new worry.

In its prepared remarks, Disney said, “At our Experiences segment, we expect that the demand moderation we saw in our domestic businesses in Q3 could impact the next few quarters.”

It added, “While we are actively monitoring attendance and guest spending and aggressively managing our cost base, we expect Q4 Experiences segment operating income to decline by mid-single digits versus the prior year, reflecting these underlying dynamics as well as impacts at Disneyland Paris from a reduction in normal consumer travel due to the Olympics, and some cyclical softening in China.”

The comments were enough to spook investors even as the company tried to somewhat downplay the slowdown at its Parks segment during the earnings call.

Parks Segment Is Witnessing a Slowdown

Providing more color on the segment, Disney CFO Hugh Johnston said during the earnings call, “The lower income consumer is feeling a little bit of stress. The high-income consumer is traveling internationally.”

He added, “But even with higher prices, people are reluctant to cancel vacations, especially with a company with a brand recognition as strong as Disney.”

However, Johnston tried to downplay the slowdown and said, “While we saw a slight moderation in demand, I certainly wouldn’t call it a significant change.”

He added, “I don’t think I’d refer to it as protracted but just a couple of quarters of likely similar results.”

Disney Is Bullish on the Movie Franchise

Meanwhile, Disney is quite bullish on its movie franchise, which contributes to its earnings through box office collections and adds to its streaming platform’s content slate. Disney took a conscious decision to make fewer but quality movies and the ploy has paid off well.

Speaking with CNBC, Johnston said, “We’ve returned ourselves to the standard of excellence that we had when we were producing multiple billion dollar films per year, and we had the three biggest films in the biggest film in May, biggest film in June and biggest film in July.”

Disney Expects Streaming Business to Deliver Double-Digit Margins

Disney expects its streaming business to eventually deliver double-digit margins which would help drive the company’s profits. During the earnings call, Iger said, “We’re seeing growth in consumption and the popularity of our offerings, which gives us the pricing leverage we believe we have.”

Notably, the price war in the streaming industry has somewhat subsided as players are now focusing on profits rather than subscriber growth. Also, leading players like Netflix, Disney, and Amazon have raised streaming prices which is a testimony to their renewed focus on the bottomline rather than just growing the subscriber numbers.

Meanwhile, while the Parks segment is currently witnessing pain due to high inflation and macro slowdown taking a toll on consumer sentiments, Disney is optimistic about that business in the long term and has committed to invest $60 billion over 10 years in that business.

“We wouldn’t be making capital investments in an accelerated way if we didn’t expect to accelerate growth,” said Johnston during the earnings call.

DIS Stock Has Underperformed

DIS stock has underperformed in 2024 and is in the red today despite the rebound in US markets. After the Monday sell-off, leading indices are trying to recoup their losses amid the recovery in global markets.