As an entertainment empire that has captivated audiences for nearly a century, Disney's standing in Hollywood is truly remarkable. Listed on the US stock market for over 60 years, Disney's historical stock performance has been impressive, notably achieving 12 consecutive years of growth from 2009 to 2020.

However, starting in 2021, Disney's stock began to descend from its lofty heights, suffering significant declines for two straight years and underperforming the S&P 500 index by a considerable margin in 2023. So, what does the future hold for Disney? Will it continue to struggle, or will it soar to new heights? To potentially forecast Disney's trajectory, we can look for clues within its financial reports, focusing on several key aspects.

1. Earnings growth

Disney's stock retreat is tied closely to its decelerating revenue growth. After soaring past 20% in 2019, the company's quarterly revenue faced a steep pandemic-induced drop. Though bouncing back after the re-opening of the economy, Disney's revenue has dwindled to low single-digit growth for the recent quarters.

Disney's revenue is primarily driven by three segments: entertainment, experiences, and sports. The experiences division—which encompasses theme parks, hotels, cruises, and consumer products—has consistently grown over the past six quarters.

After a period of sustained high growth, the experiences segment's revenue has reached a relatively high base. While international parks remain popular, domestic parks have started to cool down, with revenue growth slipping. Moving forward, it may be important to monitor park operations' popularity and whether the experiences segment's overall revenue can maintain robust growth.

The second segment is entertainment, which, in contrast to the experiences segment, has seen very lackluster growth over the past few quarters. In the first quarter of the 2024 fiscal year, there was even a 6.5% quarter-over-quarter decline.

This is primarily because, on the one hand, the cable television business has been declining in the face of streaming services. For instance, in the United States, according to Nielsen, the share of time TV users spent on cable fell from 32.9% to 28.2% between October 2022 and the end of 2023—a decline of nearly 5 percentage points in just over a year.

Disney's cable TV business has seen a significant decline in revenue over recent quarters, with a 12.5% year-over-year drop in Q1 of fiscal year 2024.

To counter the downturn in the cable TV sector, Disney is pivoting towards its streaming services, where the focus is on subscriber counts and average revenue per user (ARPU). In an effort to improve profitability, Disney has implemented price hikes in recent quarters. For instance, the monthly charge for Disney+ increased from $5.77 in Q1 of the fiscal year 2023 to $6.84 in Q1 of the fiscal year 2024, resulting in a rise in ARPU. However, this move led to declining subscribers for two consecutive quarters. The stagnation is evident as overall subscriber growth has plateaued, with Disney+ even experiencing a loss of 1 million subscribers in Q1 of fiscal year 2024.

Despite the dip in subscriber numbers, Disney's streaming services have maintained a roughly double-digit revenue growth, which has helped offset the decline from the cable TV segment.

In the entertainment division, Disney's cable TV segment may continue to face challenges. The future of its streaming services hinges on regaining steady subscriber growth, which is important for long-term revenue increases.

The sports segment, consisting of ESPN channels, ESPN+, and Star Sports, saw modest growth in fiscal 2023, with a slight 4.2% uptick in Q1 fiscal 2024. Facing new competition from streaming heavyweights like Netflix venturing into sports, Disney's stronghold with ESPN and a strategic partnership with Warner Bros may provide a competitive edge. It's worth watching if Disney can maintain stable growth in this arena.

2. Profitability

For years until 2020, Disney boasted strong profitability, with gross margins consistently above 40% and net margins generally over 15%. However, the onset of the pandemic in 2020, coupled with heavy investments in the costly streaming business, led to a sharp decline in profitability, including losses reported in 2020. Even as the pandemic effects have waned, Disney's profit levels have not significantly recovered, partly contributing to the company's lackluster stock performance over the past two years.

However, there's good news: from Q1 2023 to Q1 2024, Disney's operating profit margin has been gradually improving. This is largely attributed to the strategic focus on profitability by new CEO Robert Iger, who took the helm at the end of 2022, particularly aiming to boost the streaming division.

The streaming segment within the entertainment division saw its operating loss margin exceed 30% at its worst but has been steadily improving since Q1 of fiscal 2023. By Q1 of fiscal 2024, the operating loss margin was just about 2.5%, indicating that profitability may be within reach. Moving forward, it may be important to monitor if Disney can turn this segment from loss to profit.

Additionally, the profitability of the Disney Experiences segment may deserve close attention. Strong demand for Disney parks and cruises has supported continuous price increases, resulting in rising operating profit margins for the Disney Experiences services, which reached an impressive 44.1% in Q1 fiscal 2024, accounting for 80% of Disney's total operating profits. This segment is currently the cornerstone of Disney's earnings. Future earnings reports should be watched to see if the demand for Disney Experiences can sustain its hot streak and maintain high profitability.

3. Cash flow

Cash flow is the lifeblood of a company's survival and growth, as well as a prerequisite for shareholder returns through buybacks and dividends. Prior to 2020, Disney's free cash flow was robust, consistently ranging between $5-10 billion annually, allowing the company to execute substantial buybacks and dividend distributions. Between fiscal years 2010 and 2019, Disney returned approximately $64.25 billion to shareholders through buybacks and dividends, constituting over 90% of its net earnings of about $70.75 billion.

However, post-2020, with increased content investment and reduced operational profitability, Disney’s cash flow took a hit, leading to a pause in dividends and buybacks during the fiscal years 2021-2023, which may have contributed to its languishing stock price during this period.

In recent quarters, Disney's cash flow has improved as the streaming service made a turnaround. The company's free cash flow stayed positive for the past four quarters and saw year-over-year growth for most of the time. After releasing the earnings for Q1 2024, Disney management announced a $3 billion share buyback scheme. They expected a $8 billion free cash flow for fiscal 2024, up 60% year over year.

Going forward, we may need to keep an eye on Disney's cash flow progress and the execution of its announced buyback initiative.

Summary

Disney's revenue growth has significantly slowed down. Moving forward, we need to watch for whether the Experiences segment can maintain robust growth, if the streaming service can resume subscriber growth, and if the sports business can sustain its growth trajectory.

Disney's profitability has gradually improved over the past few quarters. We should observe whether its streaming service can turn profitable and if the Experiences segment can maintain high profitability levels.

The state of Disney's cash flow is important for dividend payments and buybacks. We may need to keep an eye on Disney's cash flow improvements and the pace at which its buyback program is carried out.