What Happened?
Shares of global entertainment and media company Disney (NYSE:DIS) jumped 9.7% in the morning session after the company reported impressive third-quarter earnings. Revenue beat slightly, leading to an EPS beat.
The top line beat was driven by 14% y/y growth in the entertainment segment, which represents nearly half of total sales. This was powered by a 14% y/y growth in the advertising business (DTC) and strong Disney+ and Hulu subscription growth in the streaming sub-segment.
The experiences segment, the second largest division, beat analysts' expectations slightly, though the growth was more modest relative to the previous year. The company observed higher guest spending in Domestic Parks & Experiences. Growth was flat in the sports segment. However, there were some promising growth indicators, with the company calling out the sequential sales increase in the Domestic ESPN advertising revenue.
Taking a closer look at the bottom line, operating income was powered by strong contributions from the streaming business (Disney+, Hulu, ESPN+), which was more profitable than expected, a big positive since this is an area of focus for the market. Content sales also strongly contributed as movies like Inside Out 2 and Marvel's Deadpool & Wolverine helped add $316 million to the bottom line. Notably, operating income in the entertainment segment more than doubled in the fiscal year, extending the momentum that had built up since the start of the year.
Lastly, EPS guidance for fiscal 2025 came in ahead of expectations, indicating that the positive momentum is still ongoing. Overall, we think this was a solid quarter.
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What The Market Is Telling Us
Disney’s shares are not very volatile and have only had 2 moves greater than 5% over the last year. In that context, today’s move indicates the market considers this news meaningful, although it might not be something that would fundamentally change its perception of the business.
The biggest move we wrote about over the last year was 9 months ago when the stock gained 10.8% on the news that the company reported first-quarter results with operating margin exceeding expectations, leading to a convincing EPS beat. The better margin performance was led by lower content costs, which is something that will be cheered by the markets because of the persistent fear that streaming platforms are simply a 'race to the bottom' where consumers demand and get amazing content but companies have to pay more and more to produce it with enough velocity to satisfy customers. Free cash flow in the quarter also beat convincingly.
Lastly, on the positive side, streaming subs beat by a small margin, and guidance for net adds to the Disney+ platform next quarter was solid and certainly better than feared.
On the other hand, its Sports revenue unfortunately missed analysts' expectations, leading to a consolidated revenue miss. Zooming out, this was a solid quarter, showing that the company has some wind at its back.
Disney is up 20.3% since the beginning of the year, but at $109.06 per share, it is still trading 11.2% below its 52-week high of $122.82 from April 2024. Investors who bought $1,000 worth of Disney’s shares 5 years ago would now be looking at an investment worth $741.15.
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