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Mind the GAAP: Profits Prioritized
Investors want to see real earnings, not projected or adjusted profits. And definitely not losses anymore. By Benjamin Tan
As far as blue chip stocks go, Walt Disney ($DIS) should be in the top tier, up there with the likes of Goldman Sachs ($GS) and 3M ($MMM), as among the most veritable names. Next year, the company will be marking its centenarian milestone: “Disney 100 Years of Wonder” is expected to be its largest global celebration. 100 years is pretty solid proof of enduring ability to maintain brand relevance and allocate capital over multiple cycles. And it has remained in the Dow Jones Industrial Average index since 1991.
Looking at the share price, however, there is not much to rejoice, especially after Q4 2022 results were released. It dropped more than 13% to close at $86.75 on November 9th, the day after earnings were released. That was the lowest closing price for Disney shares since March 20th, 2020, amid market sell-off at the outset of COVID-19. Or comparable to the time when Disney acquired 21st Century Fox in 2019 to much skepticism. In other words, the market has discounted everything that Disney has accomplished in the last 3 years, and its future is deemed to be as bad as pandemic era. Never mind the successful rollout of Disney+ (from 0 to 164 million subscribers) or however many more Marvel movies created that further expanded its franchise flywheel.
As far as the markets are concerned, Disney is more black-and-blue than blue-chip. Would probably have been more joyous for everyone if centennial celebrations were held in 2021 when Disney shares were peaking near $200!
“Show me the Money”
So what about Disney earnings that sank the stock? The main culprits appear to be a lower guide on FY 2023 operating profits, larger-than-expected Q4 operating losses at its streaming business ($1.47bn or $4bn for the full fiscal year) and underwhelming profitability at Parks, which made a 15% operating margin compared to 30% in Q3 2022.
Profitability is everything in risk-off environment. Equity investors continue to seek shelter in names that can generate consistent (and growing) earnings, hence Apple ($AAPL) has done much better than Amazon ($AMZN) and Alphabet ($GOOG), both of which reported lower operating profits in their latest quarters. Aggressive investing for growth is no longer appreciated as cost of capital continues to rise in the near-term.
Disney’s structural pivot into streaming was initially applauded by the markets, especially with the resounding success of Disney+ worldwide. It is an essential reinvention of its business model to stay relevant in the DTC and subscription economy. The costs to create a competitor to Netflix ($NFLX) were known, and breakeven was only going to happen in FY 2024. Yet, when Q4 2022 earnings came out, the market was no longer prepared to stomach larger DTC losses, even with Disney management assuring investors that they had peaked in Q4 2022. Markets today demand growing profits, so the original narrative that Disney had spun - even with the speed at which subscribers had grown - is no longer an investment highlight.
Growth is Deprioritized
Growth does not come cheap. Markets have punished growth companies that promise topline but not bottom-line. Sentiment has changed
Technology companies have fared worse than Disney - without even any profits to show. Cloudflare got punched in the face for declaring $5bn revenue in 5 years. But no word on profits (or the losses to get there). Stock went down. Even with its unit economics, it is a show-me era
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