Following a lackluster earnings report earlier this month, Walt Disney's (DIS -1.46%) stock is trading near its 52-week lows.
Investors appear to be drastically undervaluing the media titan's long-term profit potential.
1. Streaming profitability is improving
Disney's fiscal second-quarter earnings release had its fair share of bright spots. Revenue was up 13% year over year to $21.8 billion, driven in part by a 12% rise in direct-to-consumer sales, to $5.5 billion. But investors seemed to focus on a slight decline in the company's streaming subscriber base.
The total number of Disney+ subscribers decreased by 2% from the first quarter to 158 million. Hulu and ESPN+ subscribers increased slightly, but it wasn't enough to offset a drop in Disney+ Hotstar customers.
Yet some context is in order. Disney hiked the price of the ad-free version of Disney+ in the U.S. by nearly 40%, to $10.99, in December. So losing some subscribers was to be expected. The fact that it was such a small loss is evidence of Disney's impressive pricing power and customer loyalty.
Moreover, the price hikes in the U.S. and other markets helped to drive up the average revenue per Disney+ subscriber -- which includes revenue from cheaper ad-supported plans and streaming bundles -- by 13% to $4.44. These gains, combined with CEO Bob Iger's cost-cutting initiatives, drove a sharp improvement in Disney's direct-to-consumer segment's margins.
The division, which houses Disney's streaming operations, saw its operating losses shrink to $659 million in the second quarter, down from $1.1 billion in the first quarter and $1.5 billion in the fourth quarter of 2022. Iger has plans to reduce costs further, which should help Disney's streaming profitability continue to improve.
2. ESPN's value could soon be unearthed
At the same time, Disney intends to break out the results of its ESPN division in future quarters. That should make the sports leader's envious profit margins more transparent to investors.
The move to restructure its business could also be a prelude to a potential spinoff or outright sale of ESPN. Although Iger has said that divesting ESPN is not in his immediate plans, a sale could bring in tens of billions of dollars for Disney.
The sports entertainment powerhouse produces roughly $4 billion in adjusted earnings annually, which could allow it to fetch a price of approximately $40 billion, according to Morgan Stanley. Disney owns 20% of ESPN, so a potential sale would likely add over $30 billion in cash to its coffers. Disney could use the proceeds to slash its hefty debt load, which included over $45 billion in long-term borrowing as of April 1.
Selling ESPN would also substantially reduce the effects of cord-cutting on Disney's business, as the sports network operator is heavily dependent on cable bundle-driven affiliate fees. Additionally, Disney would no longer be forced to partake in bidding frenzies for sports rights, at a time when competition is intensifying from tech giants like Apple, Amazon, and Alphabet. All of which would lessen the risks for investors.
3. There's still magic in these kingdoms
Disney's parks and resorts, meanwhile, continue to crank out cash. Revenue for its Disney parks, experiences, and product division jumped 17% year over year to $7.8 billion. Operating income, meanwhile, leaped 23% to $2.2 billion.
This strong performance was fueled in part by higher traffic and guest spending at its international locations, including Hong Kong Disneyland, Shanghai Disney Resort, and Disneyland Paris. The easing of pandemic-related restrictions in China and other markets contributed to the gains.
Disney's development projects should pave the way for further gains. "We have several international expansions underway that will allow our parks to continue to build capacity and drive longer-term growth," Iger said during a recent conference call with investors.
