Disney Stock On Track For Worst Year Since 1974

Key Takeaways

• Disney stock has plummeted almost 45% so far this year, which is looking set to be the worst performance since 1974.
• The latest fall has come after the opening weekend of Avatar: The Way Of Water fell short of huge opening weekend expectations.
• Disney is under pressure from many fronts, with its streaming service Disney+ gaining massive subscriber numbers but losing money hand over fist.
• CEO Bob Chapek was fired off the back of Disney’s disappointing Q4 results, with previous CEO Bob Iger taking over.

So far this year, Disney’s stock price is down almost 45%. That puts the company on track for their worst annual stock market performance since 1974, according to FactSet.

While Disney is hardly alone in experiencing stock market volatility, it’s of particular concern given how heavily the company has been investing in divisions such as their Disney+ streaming service and the latest Avatar movie, The Way of Water.

It’s the performance of the Avatar sequel which has caused Disney stock to tumble in recent days. While the box office figures haven’t been a total flop, they’ve fallen short of expectations given the huge budget for the film. The disappointing result has caused Disney stock to fall 7.93% over the past five days.

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Avatar: The Way of Water falls somewhat flat

The problem isn’t that the latest Avatar movie has been an opening weekend flop. It hasn’t. The problem is that according to director James Cameron himself, it needs to “be the third or fourth highest-grossing film in history” just to break even.

That’s a lofty bar to clear, even for a director who already holds the number one spot with the first Avatar movie, and the number three spot with Titanic.

At $134 million in its opening weekend in the United States, The Way of Water is a hit by most traditional industry definitions. It’s the fifth best opening weekend of any film this year and the 37th biggest of all time.

Globally the story has been a bit better, with an additional $315 million from the rest of the world bringing the total to $435 million. That makes it the second biggest opening weekend of the year, behind only Doctor Strange in the Multiverse of Madness.

The reason for the pessimistic reaction to these numbers is that the film’s global target for the weekend was $500 million, with $150 – $175 million expected in the US.

As is always the case with the stock market, particularly in the short term, prices perform relative to expectations. In this case, expectations haven’t been met even though the raw numbers are really, very good.

Disney+ drags on financial performance

We’re getting used to hearing nothing but good things when it comes to Disney+. The streaming service has been lauded for the quality of its content and the pace at which it has been able to grow subscriber numbers.

That’s not a shock. With a stable of IP that includes Marvel, Pixar, Star Wars, 20th Century, FX, National Geographic, ABC, ESPN and, of course, Disney itself, there’s an almost unlimited supply of high quality content for subscribers.

With subscriber numbers hitting 164.2 million at the last quarterly update, the streaming service is now only behind Netflix (223 million) and Amazon Prime Video (200 million). What makes that so astounding is that both of those companies had a 12 year head start on Disney.

The thing is though, this level of expansion costs money. A lot of money.

In Q4 this year their streaming business lost an eye-watering $1.5 billion. Not only is that crazy high, but it’s way more than the $630 million that it lost the same time the year before. The losses are also expected to continue for some time yet.

In a letter to shareholders, CEO at the time, Bob Chapek, stated they didn’t expect the division to reach profitability until the fiscal 2024 year.

It’s obvious to see the long term benefits for Disney of positioning themselves as a streaming powerhouse. But it’s also understandable for shareholders to feel a little nervous about the sizable losses.

It was hoped that a big win on the Avatar movie would help plug this gap.

Disney sacks CEO after Q4 results

All of this is causing turbulence at Disney. The poor Q4 results, combined with a disappointing forward forecast, caused CEO Bob Chapek to pushed out of the company and replaced by previous CEO Bob Iger.

One Bobs out, another Bobs in.

Bob Iger is considered to be one of the most successful Disney CEOs ever, and bringing him back was a major surprise. It’s clear that shareholders and the company’s board desperately want a steady hand to right the ship.

Disney’s stock rose swiftly when the news broke in late November, but the turnaround didn’t last long.

Iger led the company through the acquisitions of Pixar, Marvel, 21st Century Fox and Star Wars’ Lucasfilm. He also led the charge into streaming with the creation of Disney+. With a track record like that, shareholders will probably be expecting some major moves to get Disney back in the green.

They might be disappointed.

Iger has agreed to sign on as CEO for two years, with Disney stating that he will tasked with setting a “strategic direction for renewed growth and to work closely with the Board in developing a successor to lead the Company at the completion of his term.”

So, right the ship and hire his replacement.

Could Disney spin off ESPN and ABC?

One suggestion that’s been made by analysts from Wells Fargo is for Disney to spin off ESPN and ABC, even going so far as to say that it’s a “reasonably probably late-’23 event”.

The move would see ESPN and ABC separated into their own companies, allowing Disney to focus purely on its own content and theme parks business.

There are a number of reasons why this could work. It would give Disney more flexibility to make strategic decisions and allocate resources based on the specific needs of each business unit.

Spinning off ESPN and ABC would allow Disney to focus more intently on the core of its business, such as its theme parks, film studio, and consumer products division. This increased focus could lead to more innovation and better performance in these areas.It means the significant IP of Disney could be valued based on more simplistic metrics, without needing to consider how a traditional TV network and cable sports provider fit into more modern offerings such as the Disney+ streaming service.

What does Disney’s slump mean for investors?

There’s no getting away from the fact that Disney’s stock price has caused existing shareholders some serious pain. The question is, how long will that pain last? Now could be a great time to get into the stock, but with an uncertain economic environment ahead, it could still have further to fall.

That’s the eternal challenge with investing. One of the best way to limit the downside is through diversification. Yes, it’s a fundamental aspect of investing, but it’s fundamental for a reason.

True diversification isn’t just about picking a handful of stocks for your portfolio. It’s about holding dozens of individual securities and even different asset classes. But that can be daunting. Knowing which assets to choose, when to move money from one to another can be a full time job.

Or, you could enlist the help of AI to do the heavy lifting for you.

We’ve created Investment Kits (what we call portfolios) which use the power of AI to predict the performance of various different assets, and then automatically adjust the holdings to match these predictions.

Take the Smarter Beta Kit for example. This Kit invests in a range of different factor-based ETFs, which are created to target securities that exhibit characteristics that fit those factors. So that could be ‘value’ stocks that seem underpriced, ‘growth’ stocks that are looking ready to pop or ‘quality’ stocks which show stable and consistent earnings growth.

Every week our AI predicts how these factors are expected to perform on a risk adjusted basis, by analyzing a huge level of historical data. It then automatically adjusts the percentage weighted to each of these ETFs, based on those projections.

It’s high tech stuff, but in a challenging investment environment like we’re in right now, it’s an edge well worth taking. Luckily, we’ve made it available to everyone.

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