Walt Disney Stock is Set to Reset Expectations

November 14, 2022 Stan

Media and entertainment giant The Walt Disney Company (NYSE: DIS) stock has seen better days as shares cratered under the $90.71 double bottom on its weak Q4 2022 earnings release. Since the pandemic, Disney has been identified as a video streaming company and judged by its subscription base for Disney+ since the pandemic. The market has largely ignored its legacy theme parks, cruises and merchandising businesses to focus solely on its streaming content wars with competitors Netflix (NASDAQ: NFLX), Amazon Prime (NASDAQ: AMZN), Warner Brothers Discovery (NASDAQ: WBD), Peacock (NASDAQ: CMCSA) and Paramount Global (NASDAQ: PARA). The streaming business, which is listed under its direct-to-consumer (DTC) segment, continues to grow as it surpasses 230 million total subscribers between its three services. The advent of its ad-supported tier starting Dec. 8, 2022, should help to bolster growth and share price as it did for competitor Netflix. It’s theme parks are performing surprisingly well despite economic headwinds including inflationary pressures, strong U.S. dollar, and waning consumer discretionary spending.

Walt Disney Stock is Set to Reset Expectations

Competition Getting Fiercer

Disney is facing threats from all angles in its direct-to-consumer (DTC) segment. Taking a cue from Amazon, Netflix is encroaching on Disney’s ESPN space as it plans to broadcast live sports programming. Warner Brother Discovery has taken Disney’s template to announce a 10-year plan for its DC Universe (DCU) that will mirror the Disney’s Marvel Cinematic Universe (MCU) which includes hiring a team like Disney did with Kevin Feige, the mastermind behind the MCU. They will focus on the most popular IPs including Superman, Batman, Wonder Woman, and Aquaman. The team is led by director James Gunn and product Peter Safran. James Gunn was the director of the wildly popular Marvel’s “Guardians of the Galaxy” movies.

Layoffs and Freezes are All the Rage

With the U.S. Federal Reserve looking for drops in CPI and employment to curb interest rate hikes, the market is hungry for bad news. What would normally be considered bad news for the workforce is apparently good news for the stock. Layoffs and freezes are the new buzzwords that can trigger an extensive rally in the underlying stock. This was evidenced by Meta Platforms (NASDAQ: META) mass layoff announcement that rallied shares over 15%. Amazon implemented hiring freezes and started layoffs including the entire Robotics division which consisted of over 3,700 people. This propelled its shares further on its 14% rally. Lyft (NASDAQ: LYFT) joined the firing spree as it announced lay-offs which helped shoot up shares 12%. Disney’s purported “targeted hiring freeze” helped spring its shares spring back above the $90.71 critical support level. An internal memo quoted CEO Chapek stated Disney was limiting headcount additions through a targeted hiring freeze but hiring for “the small subset for the most critical, business-driving positions will continue.” Rather than any formal announcement of job cuts, they do anticipate staff reductions as part of the review process.

Descending Triangle Breakdown Attempt

The weekly candle stick charts illustrate a descending triangle breakdown pattern. This pattern is formed making lower highs on bounces while lows are flat forming an apex point at $90.71 for the breakdown. Eventually, each bounce gets smaller due to selling pressure mounting but buyers stand firm at the lows until eventually, the bottom falls out. DIS broke the triangle apex point on its fiscal Q2 2022 earnings release as shares collapsed to a low of $86.28 on extremely heavy volume. However, the combination of a weaker than expected CPI report signaling and a purported “targeted hiring freeze” helped rally the shares back up through the apex point. The weekly market structure low (MSL) triggers above $102.30, which will overlap with the falling 20-period exponential moving average (MA) at $104.89 and followed by the weekly 50-period MA at $120.52. From here, either the stock will breakout through the weekly 20-period EMA at $105 or break down through the apex support at $90.71. The massive weekly volume may indicate a capitulation point in the sell-off. Pullback support levels to key an eye on are the $95.71 descending triangle resistance, $86.28 post-earnings low, $79.07 pandemic low, $69.85, and $60.41.

Earnings Shortfall and Streaming Metrics

On Nov. 8, 2022, Disney released its fiscal fourth-quarter 2022 results for the quarter ending September 2022. The Company reported an adjusted earnings-per-share (EPS) profit of $0.30 excluding non-recurring items versus consensus analyst estimates for $0.56, a (-$0.26) miss. Revenues rose 8.7% year-over-year (YoY) to $20.15 billion, falling short of consensus analyst estimates for $21.44 billion. It’s DTC streaming business revenues grew 8% YoY to $4.9 billion. Operating losses were $1.5 billion due to higher losses at Disney+, slowdown in HULU subscriptions, but an increase in ESPN+ subscriptions. Subscriptions for Disney+ grow 39% YoY 164.2 million, HULU grow 8% to 47.2 million, and ESPN+ grow 42% to 24.3 million.

Disney Parks are Still Growing Strong

The pent-up demand continued to propel Disney Parks, Experiences, and Products revenues to $7.4 billion, up from $5.5 billion in the year ago period. Operating income for the segment rose $900 million to $1.5 billion, compared to $600 million in the year-ago period. Increase in both domestic and international volumes, guest spending offset cost inflation and higher support costs. International parks and resorts growth was fueled by Disneyland Paris but offset by a decrease in Shanghai Disney Resort, which made headlines for locking in visitors who didn’t provide a negative COVID result under China’s zero-COVID policy.

CEO Comments

Disney CEO Bob Chapek commented, “The rapid growth of Disney+ in just three years since launch is a direct result of our strategic decision to invest heavily in creating incredible content and rolling out the service internationally, and we expect our DTC operating losses to narrow going forward and that Disney+ will still achieve profitability in fiscal 2024, assuming we do not see a meaningful shift in the economic climate. By realigning our costs and realizing the benefits of price increases and our Disney+ ad-supported tier coming December 8, we believe we will be on the path to achieve a profitable streaming business that will drive continued growth and generate shareholder value long into the future.”