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[August 2024] Has Disney turned around? Pay attention to these 3 performance signals.

[August 2024] Has Disney turned around? Pay attention to these 3 performance signals. -1

As an entertainment kingdom that has been around for nearly a century, Disney's status in Hollywood is world-renowned. In the more than 60 years since its listing on the US stock market, $Disney(DIS.US)$'s historical stock price performance has also been impressive, including a 12-year miracle of continuous growth from 2009 to 2020.

[August 2024] Has Disney turned around? Pay attention to these 3 performance signals. -2

However, starting in 2021, Disney's stock price began to fall from grace and suffered two consecutive years of decline, with its rise in 2023 far behind the S&P 500 index.

Recently, Disney will release its latest performance report. Every release of its performance report may also mean a good trade or investment opportunity for the company. Prior to this, investors need to understand how to interpret its performance report.

So, will Disney continue to slump or return to its peak in the future? We can look for clues from its performance, focusing on revenue growth, profitability, and cash flow levels.

1. Revenue growth rate

The sharp decline in Disney's stock price is largely due to the significant slowdown in revenue growth. The company's quarterly revenue growth rate was over 20% during the 2019 period, but after experiencing a cliff-like decline due to the pandemic and subsequent rebound, it has begun to slide sharply again in recent quarters, maintaining low single-digit growth throughout the year.

[August 2024] Has Disney turned around? Pay attention to these 3 performance signals. -3

Specifically, Disney's current revenue mainly includes three areas: the entertainment business, the experience business, and the sports business. Looking at the financial data from the past six quarters, the experience business, which mainly includes park resorts, hotels, cruises, and consumer goods, is the cornerstone of revenue growth, with the highest growth rate in each quarter among the three business areas.

However, after several years of high growth, the revenue of the experience business has reached a relatively high base. Although the international park still maintains high popularity, the domestic park has started to cool down, and the revenue growth rate has continued to decline. We can continue to observe the popularity of park business and whether the overall revenue of the experience business can maintain steady growth.

[August 2024] Has Disney turned around? Pay attention to these 3 performance signals. -4

The second business is the entertainment business, which, unlike the experience business, is dominated by cable TV and streaming media businesses. Its growth rate has been very low in several previous quarters, with continuous year-on-year declines of more than 5% in the first two quarters before 2024.

This is mainly due to the fact that on the one hand, cable TV business has long been in decline under the impact of streaming media industry. For example, according to Nielsen's statistics, from October 2022 to May 2024, the proportion of TV viewers' time spent on cable TV in the US fell from 32.9% to 28.2%, a decrease of nearly 5 percentage points in just over a year.

Disney's cable TV business revenue has also shown a significant downward trend in recent quarters, with a year-on-year decline of 12.5% in the first quarter of the 2024 fiscal year and a further decline of 7.8% in the second quarter of 2024.

To cope with the decline of the cable TV industry, Disney is also transitioning to the streaming media business. The core of the streaming media business is the number of subscribers and the average revenue per user (ARPU). In recent quarters, in order to improve its profitability, Disney has taken some price increase measures, such as raising the monthly fee for Disney+ in the North American region from $5.77 in the 2023 Q1 quarter to $7.28 in the 2024 Q2 quarter, which has also driven up ARPU.

Under the impact of price increases, Disney's overall number of users has stagnated for several quarters. The good news is that in the 2024 Q2 quarter, Disney's overall number of users returned to growth, with Disney+ North America's users growing by 6.9 million compared to the previous quarter.

Therefore, against the backdrop of rising volume and price, Disney's streaming media business revenue still maintains double-digit growth in the 2024 Q2 quarter, which, to some extent, offsets the decline of the cable TV business.

[August 2024] Has Disney turned around? Pay attention to these 3 performance signals. -5

In the future, regarding the entertainment business, Disney's cable television business may still be difficult to reverse its decline. As for the streaming media business, we need to observe whether the number of paid users can maintain steady growth. This is the foundation for long-term revenue growth.

The third business is sports, mainly including ESPN channels, ESPN+ and Star Sports. This business had an average performance in the 2023 fiscal year, with a year-on-year Q1 increase of about 4.2% and a Q2 increase of about 2%. Currently, streaming media giants such as Netflix are also developing sports businesses. Disney has the advantage of traditional channels like ESPN and has recently joined forces in content with Warner Bros. They may have a certain competitive advantage. We can continue to observe whether Disney's sports business revenue can achieve steady growth in the future.

2. Profitability

Before 2020, Disney's profitability was very strong, with a gross margin consistently over 40% and a net profit margin of basic 15% or more. However, starting in 2020, with the impact of the pandemic and the company's continuous investment in burning streaming media businesses, Disney's profitability began to decline rapidly.

The appearance of losses in 2020 and the gradual reduction of the impact of the pandemic have not helped Disney's profit level significantly. This is also one of the core reasons why the company's stock price has been lackluster in the past two years.

[August 2024] Has Disney turned around? Pay attention to these 3 performance signals. -6

However, the good news is that Disney's operating profit margin level has been continuously improving overall from 2023 Q1-2024 Q2 period. The reason behind this is largely due to Disney's CEO Robert Iger, who took office at the end of 2022 and made improving profitability a strategic priority, especially in terms of improving the profitability of streaming media businesses.

The operating loss rate of the entertainment sector's streaming media business was over 30% at its worst. It improved from the first quarter of the 2023 fiscal year and finally achieved profitability in the 2024 Q2 fiscal quarter. Although the profit margin is only a negligible 0.8%, it is undoubtedly a good start. In the future, we can continue to observe whether this business of Disney can maintain a sustainable profitable rate and further increase the level of profit margin.

[August 2024] Has Disney turned around? Pay attention to these 3 performance signals. -7

At the same time, we also need to pay particular attention to the profit margin of Disney's experience sector. Due to the strong demand for Disneyland and Disney Cruise supports the continuing rise in service prices, the operating profit margin of Disney's experience service has remained at a relatively higher position, at around 27.2% for the 2024 Q2 fiscal quarter. It also contributed to around 60% of Disney's overall operating profit, which can be said to be the cornerstone of Disney's current profitability. Therefore, in the future performance, we need to continue to observe whether the demand for Disney experience business can continue its hot trend and maintain a relatively high level of profit margin.

3. Cash flow level.

Cash flow is the foundation for a company's survival and development, as well as the premise for returning value to shareholders, buybacks, and dividends. Before 2020, Disney's free cash flow was relatively strong, and it was consistently maintained between 5-10 billion US dollars. The company often carried out large-scale buyback and dividend operations. Between fiscal year 2010-2019, cumulative buybacks and dividends were about $64.25 billion, which was more than 90% of net profits used to repay shareholders.

[August 2024] Has Disney turned around? Pay attention to these 3 performance signals. -8

However, after 2020, with Disney increasing content investment but experiencing a significant decrease in profitability, the overall cash flow situation stepped down. Disney also suspended some divestitures and buybacks from 2021-2023 fiscal year, which may also be one of the important reasons for the company's continuous low stock price.

In recent quarters, as the company's streaming media business has turned losses into gains and its cash flow situation has improved. Disney's free cash flow has been positive for the past five quarters and has maintained year-on-year growth for most of the time. After the fiscal 2024 Q1 report, Disney management also announced a new buyback plan. The company expects to achieve about $8 billion in free cash flow in 2024, a year-on-year increase of about 60%, and add a $3 billion buyback plan.

In the future fiscal quarters, we can continue to observe Disney's cash flow improvement and the implementation of its buyback plan.

By reading Disney's performance, you may have some new understanding here. It is worth mentioning that every release of performance by many star companies may mean a rare trading opportunity for different types of investors.

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Conversely, if investors believe that the latest performance of a certain company will not be optimistic and will bring pressure on the short-term stock price, investors may consider short selling, which can be done by considering margin selling or buying put options.

Of course, if investors think that the bullish and bearish direction of a company's performance is unclear, but the stock price may experience significant fluctuations after the performance release, then investors may consider the straddle strategy of buying call and put options to capture potential opportunities.

Finally, to summarize,

Disney's revenue growth has slowed significantly, and we need to observe whether the experiential business can maintain steady growth in subsequent performance, whether the paid users of the streaming media business can return to growth, and whether the growth of the sports business can continue.

Disney's profitability has been slowly improving in recent quarters. We can observe whether the streaming media business can maintain stable profitability and whether the experiential business can maintain a higher level of profitability.

The cash flow situation of Disney is the premise of dividends and repurchases. We can observe the improvement of Disney's cash flow situation and the execution pace of the repurchase plan.

[August 2024] Has Disney turned around? Pay attention to these 3 performance signals. -9

Disclaimer: The above content does not constitute any act of financial product marketing, investment offer, or financial advice. Before making any investment decision, investors should consider the risk factors related to investment products based on their own circumstances and consult professional investment advisors where necessary.

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