Disney Earnings: Lots of Good, Especially for the Flashy Metrics, but Underlying Issues Remain

Key Morningstar Metrics for Walt Disney

• Fair Value Estimate: $115.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Walt Disney’s Earnings

In a fiscal first-quarter report overflowing with news, Walt Disney DIS showed significant progress in several important business lines and offered reasons to be excited. In our view, the most unequivocally positive result was the firm’s significant margin expansion. But from a top-line perspective, some of the news (particularly surrounding live sports making its way to streaming and encouraging Disney+ trends) is merely consistent with the ongoing evolution of Disney’s business.

As an offset to its grand streaming plans, the results in Disney’s linear and licensing businesses were lukewarm to poor. We believe the quarter validates the strength of the company’s assets and its ability to survive the evolution of the media industry. However, we don’t think the story has changed. We’re maintaining our $115 fair value estimate and now believe the stock is only modestly undervalued.

Disney is now all in on streaming live sports. In addition to the planned joint venture with Fox and Warner to put their respective linear sports programming on a streaming platform in 2024, Disney announced it will offer all linear ESPN programming on a standalone platform with ESPN+ by the fall of 2025. We believe these alternatives are critical as pay-TV subscriber bases continue to decline. Still, we don’t expect a huge incremental revenue stream, as we believe much of the streaming revenue gains will be offset by accelerating linear losses.

We anticipate that pay-TV distributors will demand lower affiliate fee payments and/or require that streaming access be included for their pay-TV subscribers, as seen in the recent agreement renewal between Charter and Disney. Further, if these services are priced too low, they will likely expedite the demise of the pay-TV bundle, and if they’re priced too high—so that they look more similar to a pay-TV bundle—we question how much demand they’ll generate.