A stock market sell-off in 2022 brought declines across numerous industries, and entertainment companies were among the hardest hit. Shares in such names as Netflix, Warner Bros. Discovery, and Walt Disney (DIS -0.22%) have fallen between 41% to 59% as macroeconomic headwinds have proven tough to overcome.
Despite market declines, the past year has shown the potency of Disney's content and nearly unparalleled dominance in entertainment. Here's why Disney shares are worth an investment in 2023.
An entertainment titan
This year will mark 100 years of business for The Walt Disney Company, solidifying it as one of the most successful entertainment businesses in history. The House of Mouse has remained a pillar of the industry with its strength at the box office, theme parks, and now video streaming.
Despite launching Disney+ in 2020 and gaining a majority stake in Hulu in 2019, last year saw the company truly dive headfirst into the streaming industry with heavy investment. The company spent about $30 billion on content to grow and fuel Disney+ as well as its theatrical releases. However, the pace of film releases and ticket sales is still working its way up to pre-pandemic numbers. As a result, Disney's media and entertainment segment saw revenue in its 2022 fourth quarter dip 3% year over year to $12.7 billion and operating income plummet 91% to $83 million.
The bright spot of the quarter was Disney's parks business, which saw guests arrive in droves after pandemic reopenings. The segment's revenue soared 36% year over year to $12.7 billion, with operating income rising over 100% to $1.5 billion.
While the company's hefty content spending may be concerning, Disney did what it set out to do by reaching the most streaming subscribers in the industry in the third quarter of 2022, surpassing industry leader Netflix and retaining the top spot in the fourth quarter. In its latest quarter, Disney's total streaming subscribers came to 235.7 million while Netflix's was 223.1 million.
Now that Disney has won the streaming war, at least for now, 2023 can be the year it focuses on profitability for its video platforms. The company revealed in its latest quarterly report that it expects operating losses to "narrow going forward" as it works toward achieving profitability for Disney+ in fiscal 2024.
Disney is maximizing profits
Last year was a time of transition for Disney. In 2020 and 2021, the pandemic brought steep declines to its box office and parks revenue while also boosting its streaming business. In the past 12 months, Disney responded to headwinds by working to restructure its business with a focus on maximizing profits over the long term. Restructuring has been costly, but with it mostly in the rearview mirror, this new year should see Disney's earnings on an upward trajectory.
Across its entire business, Disney has prioritized maximizing revenue per consumer. At its parks, this has come in the form of increasing ticket prices and monetizing once-complimentary services such as its Fast Pass program. The changes allow the company to keep revenue up even if park attendance falters, which could be the case in a recession.
Additionally, Disney has increased its average revenue per user (ARPU) on its streaming platforms by introducing significant price hikes across all of its services and launching an ad-supported tier on Disney+. ARPU is becoming an increasingly important metric in the streaming industry and a better way of measuring the success of a service than subscriber count, so Disney's focus on it is promising. When Disney+ launched in 2019, its monthly subscription fee came to the industry-low price of $6.99/month, roughly half of Netflix's standard plan at the time. The low entry point did its job of attracting millions of new members. However, necessary price increases will bring the company closer to its goal of profitability as its compelling content with such franchises as Marvel, Star Wars, and Pixar convinces users to stay.
As of Q3 2022, Disney held the biggest market share in streaming with a 25% share between Disney+ and Hulu, while Netflix was the second largest at 21%. And there is still plenty of room for growth. According to Fortune Business Insights, the industry was worth $473 billion in 2022 and could expand at a compound annual rate of 19.9%, hitting $1.69 trillion by 2029. Disney's rise to the top has put it in a prime position to profit from the market's expected growth.
An investment in Disney is undoubtedly a long-term one as it will need time to begin reaping the rewards of its recent restructuring. However, the company's ability to overtake industry leader Netflix (which held the top spot for over a decade), along with glowing park attendance, are signs that it's on the right track. With Disney's stock down 41% since last year, now is an excellent time to invest in the entertainment star.
Dani Cook has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix and Walt Disney. The Motley Fool recommends Warner Bros. Discovery and recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.