Shares of The Walt Disney Company (DIS, Financial) have lost their magic in recent years. The media giant's woes began years before the pandemic hit, with the stock ultimately going nowhere for more than three years even before Covid hit.
Undoubtedly, the company's streaming service, Disney+, helped Disney stock reach new highs during the early days of the pandemic. Fast forward to today, and all such streaming-inducing gains have been lost and then some. Today, Disney shares are right back to their late-2014 lows.
Thus, it's no surprise investors seem mixed over the return of long-time CEO Bob Iger. Iger hasn't had a perfect track record, especially during his last tenure at Disney. Though many frustrated Disney shareholders may want new blood at the helm, I believe Iger may be the only man with the know-how to untangle the mess the company currently finds itself in.
The pandemic and recession have made Disney something of a perennial underperformer. However, I don't think you can blame the macro picture or tough industry headwinds for Disney's five years of weakness. Media has faced a beating in recent years amid changes to the industry. As the formerly-dominant media giants evolve, it's uncertain what the "right" price will be for the content kings.
Disney's still the king of content, but it needs a pivot
Disney still has some of the best brands in the industry, but while the company has the pocketbook to splurge on big budget movies and television programs in its cinematic universes, questions linger as to whether the Disney brand is capable of generating a high enough return on invested capital consistently.
The streaming business has gotten a whole lot tougher in recent years, and your average Disney production is not cheap. We may be entering an era where Disney shuffles around its content strategy to make streaming more profitable. Perhaps Disney will consider tightening the purse strings, at least until high rates subside but likely beyond as well due to the extreme competition.
Netflix (NFLX, Financial) has experienced profound success with some of its lower-budget television shows, including Squid Game and The Queen's Gambit. Not every low-budget show can be a smash hit. However, the risks are noticeably lower the less a company pays in the way of production costs. After all, an unexpected big-budget flop hurts much more a low-budget flop.
The days of big-budget blockbusters are far from over, however. Paramount's (PARA, Financial) "Top Gun: Maverick" is arguably one of the successful films to hit the silver screen in years. It proves that blockbusters can still drive meaningful growth. Further, Paramount's Halo television series on Paramount+ is an intriguing offering that has likely drawn plenty of viewers away from various competitors. Like with any project, some balance must be found between investing in growth and driving nearer-term profitability. I think Disney has much to gain in an era of cautious spending.
As other streaming companies, like Apple (AAPL, Financial) TV+ and Amazon (AMZN, Financial) Prime Video, step up their game, we may also be entering an era where unique stories separate the winners from the losers in the streaming world.
Of course, there will always be an appetite for a visually-appealing film like "Avatar: Way of the Water." In any case, I do believe Disney needs to go above and beyond relying on its strong brands to outpace streaming rivals as credit conditions become harder.
Disney's spending pullback could help spark a turnaround
Since going public, Warner Bros. Discovery (WBD, Financial) received quite a bit of negative press for the cancellation of much-anticipated shows. However, the company had a considerable amount of debt and needed to be more selective with the projects it chose to go forward with.
Though Disney may have more financial flexibility than a Warner Bros. Discovery to pursue a larger number of ambitious projects, I do think Disney could wind up following in its footsteps by taking its foot slightly off of the content production gas pedal.
Indeed, high interest rates have incentivized almost everyone to focus in on improving margins. Growth will always matter, but as a recession looms and inflation remains out of control, rates will be likely to stay higher for a while longer, so earnings and efficiency matter more right now. Disney is starting the layoff process this week, with 7,000 jobs to be cut.
Fortunately, Disney+ is faring incredibly well with its ad-based tier. Reportedly, 36% of new users are going with the ad-supported option as of the third month. That's a much higher rate than some of its rivals aiming to get a slice of ad-based streaming. I think the solid start for the ad-based tier means Disney may have an easier time sailing through some terrible economic conditions.
Final thoughts
I think Iger can turn the ship around at Disney as the company gets leaner and more selective with spending. It may take a while, but I think there's much to gain as Disney shifts gears from growth to profitability.
