After Disney stock plummeted over 13% to close under $87 following the company’s fiscal fourth quarter earnings call, Wall Street analysts and investors had criticism for CEO Bob Chapek and his stewardship of the company, with CNBC television personality Jim Cramer calling for Chapek to be fired. This recaps what happened and discusses the reasons for deep disappointment.
For starters, Disney stock closed at $86.75 a share, which was down more than 13% following the earnings call. This was due to significant misses on revenue and earnings per share, but more significantly on the Walt Disney Company’s weak forward-looking earnings forecast.
The single-day plunge was the biggest for Disney shares since March 2020, when the stock market was ravaged due to COVID fears and the stock also fell 13%. With this drop, Disney’s stock reached its lowest price since 2014, with a fall of more than 40% in 2022. That’s far worse than the Dow Jones Industrial Average, but in fairness, is closer to on par with its streaming service counterparts. Moreover, Disney recovered in the day since, with its share price closing at $90.46 today.
Also in fairness, Disney did have some bright spots in the earnings call. Disney+ added 12.1 million subscribers to hit 164.2 million globally, and 14.6 million total direct-to-consumer (DTC) customers in its fiscal fourth quarter. Both numbers beat analyst estimates and blew away this quarter’s additions by Netflix, which gained just 2.4 million new subscribers in the quarter.
However, Disney’s DTC segment also posted $1.47 billion in fourth-quarter operating losses (you read that correctly—a loss of almost $1.5 BILLION in a single quarter), roughly 134% more than the $630 million it reported in the prior-year quarter.
CEO Bob Chapek said Disney expects that amount to “narrow going forward” and for Disney+ to become profitable in fiscal 2024 (still). Both of those things are “assuming we do not see a meaningful shift in the economic climate,” according to Chapek.
Walt Disney World and Disneyland were another bright spot. The Disney Parks division posted $7.4 billion in fourth quarter revenue, compared to $5.5 billion in the prior-year quarter.
Revenue for the parks division was $28.7 billion, up a whopping 73% from the previous fiscal year, while operating income increased $7.9 billion for the fiscal year.
As always, this was due to per guest spending growth. That was fueled by price increases to tickets and…pretty much everything else. The full year growth was also attributed to Genie+ and Lightning Lanes, which rolled out in the first quarter of the current fiscal year.
Nevertheless, profitability is weighing heavy on Wall Street despite the performance of theme parks and subscriber growth of the streaming services. CEO Bob Chapek and CFO Christine McCarthy attempted to reassure investors and paint these results in the best light possible during the commentary and questions & answers segments of the earnings call.
However, plenty of concerns remain, especially as the economic environment appears to be entering a downturn or possible recession. Traditional businesses like linear TV are under significant pressure from cord-cutting. DTC continues to hemorrhage money. Theme parks look strong for now, but their resiliency is a concern during a recession. Those are just some of the many headwinds facing Disney in 2023 and beyond.
Consequently, virtually every Wall Street analyst who has published an investor note since has reduced their rating of Disney’s stock, cut their price target, or done both.
In a flurry of investor notes, analysts debated Disney’s earnings report and conference call with executives. Several explained their rationale for increased bearishness and called into question the divergence between Wall Street expectations for 2023 and Disney’s more conservative guidance.
Despite that, and some blistering commentary expressing disappointment with leadership, they largely maintained existing recommendations to investors and didn’t issue downgrades based on the latest numbers.
Michael Nathanson of MoffettNathanson said the “biggest controversy” is Disney’s forecast for fiscal 2023 segment earnings growth of high single-digits, which was far below Wall Street’s consensus of 25%. His own outlook was previously for 34% growth, and he conceded that “rarely have we been so incorrect in our forecasting of Disney profits.”
Nathanson continued, “Given the company’s confidence that Parks trends appear resilient, it appears that the culprit for the massive earnings downgrade is much higher than expected DTC losses and significant declines at linear networks.” Nathanson now has a neutral rating on Disney, lowering his 12-month share price target by a colossal $30–to $100–signaling he believes it’ll perform on par with the market.
Michael Morris of Guggenheim titled his Disney note: “These Are Not The Results You’re Looking For.” The title pretty much says it all, with corresponding analysis of Chapek’s guidance going forward and the headline misses in the fourth quarter report.
Morris likewise dropped his 12-month price target by $30 to $115 from $145. Despite this, he still has a buy rating on the Walt Disney Company.
Jessica Reif Ehrlich at Bank of America Securities conceded the quarter was “tough,” but she still had rosier commentary than many of her counterparts.
She had previously been incredibly bullish on Disney, saying the company had been “hitting it out of the park” with streaming. Ehrlich reiterated her buy rating on the stock, but trimmed her 12-month price target to $115 from $127.
She wrote in an investor note that the quarter and forward looking outlook were disappointing, “but not as bad as headline numbers may suggest.” Ehrlich reiterated that “underlying theme park demand remains healthy and the operating income miss is largely due to one-time items vs. moderating demand.”
She also pointed out that Disney’s linear networks are “experiencing many of the same headwinds other industry participants are facing, but we believe their iconic brands and scaled/growing DTC service position them well to better manage these headwinds and industry transitions relative to peers.”
Ben Swinburne of Morgan Stanley expressed similar sentiment, reiterating his overweight rating on the stock. He set a $125 price target for Disney, placing it firmly in buy territory. Swinburne said the scaled back revenue and profit guidance for fiscal 2023 are “primarily a function of margin pressure at legacy TV networks, with lower F4Q Parks & Streaming results also contributing.”
Swinburne’s investor note reflected such optimism: “We remain bullish the Parks segment growth outlook, continue to expect it will represent the majority of Disney’s EPS over time, and believe shares are undervaluing the Parks assets at current level.”
Then there was the prolific CNBC “Mad Money” host Jim Cramer. It should be noted that Cramer is a talking head who offers financial “entertainment” rather than investor analysis (much like prime time cable “news” programming). While Cramer has a loyal fan following, he’s generally not taken seriously by anyone but retail investors.
In typical Cramer fashion, he made the radical suggestion that Disney get rid of CEO Bob Chapek. (It’s also worth noting that Cramer has generally been very “friendly” towards Chapek and deferential towards Disney, even during this year’s current stock slide. So this is quite the about-face for him.)
“Disney, they have ESPN. If we were on ESPN, we would say Chapek has got to be fired. That’s pretty cut and dry,” Cramer said on CNBC’s Squawk Box. “The losses are just mind-boggling. When you’re going over the quarter, it’s stunning.”
Cramer joined the CNBC Squawk Box panel to discuss Disney’s earnings and election results with Andrew Ross Sorkin. During their discussion of Disney, Cramer criticized Chapek for his weak explanation for the quarter. Chapek’s commentary accompanying the earnings focused mostly on the Disney+ subscription growth, while downplaying the staggering losses. This was despite Chapek being cognizant of Wall Street’s decreased emphasis on subscriber growth and focus on the financials.
Cramer said that “The way [Chapek] handled it, he made it sound like it was a four-star quarter. Delusional.” When asked if he was in favor of the board firing CEO Bob Chapek, Cramer was crystal clear: “Absolutely. Absolutely. Absolutely.”
“He had a couple of years,” Cramer continued. “The team’s going downhill. I mean…I had faith, but there is no doubt that he has to go. I mean that was just unconscionable.”
Cramer went on to say that he believed in Chapek, but he was wrong. Curiously, Cramer said even the theme parks, which Chapek was supposedly “good at,” were not performing. This assertion isn’t supported by the quarter’s results or forward-looking guidance, but CNBC has recently focused increasing attention at fan “unrest” with Walt Disney World and Disneyland, so perhaps that’s what Cramer meant?
Regardless, Cramer’s conclusion on Chapek and his future with the Walt Disney Company were unequivocal: “He’s gotta be fired,” stated Cramer. “That’s pretty cut and dry.”
In terms of commentary, I don’t have much to add at this point. We have a future article doing a deeper dive, but for now, only want to call attention to a couple of things analysts might be overlooking.
One thing we’ve pointed out repeatedly is that Chapek is not a good communicator. It’s ironic that a company specializing in storytelling has a leader who is utterly incapable of presenting a compelling narrative or delivering a message in a way that seems sincere and heartfelt, rather than stilted and scripted.
While Chapek has plenty of problems, one of his biggest is that he’s just not as convincing as Bob Iger. When Chapek stays on-script, it comes across as robotic; when he goes off-script, he often sounds condescending or ends up putting his foot in his mouth. It seems like these exact same financials and forward-looking forecast would’ve been received much better by Wall Street had they been delivered by Bob Iger.
Beyond messaging, there are question marks going forward. First is the expiration of a ton of Disney+ introductory offers that coincided with the launch of the streaming service. That deal offered 33% off a three year subscription, costing $140 in total up until now.
It was essentially a buy 2 years, get 1 free deal—or less than $4 a month. It remains to be seen how many of those will renew at full price versus cancel, but it’s probably a good thing that Disney+ is launching an ad-supported tier.
We don’t think Walt Disney World is going to see demand drop off a cliff, but historical precedent during past recessions is instructive. Even in the absence of economic downturn, 40% year over year increases to per guest spending are unsustainable. That’s especially true now that the gains from Genie+ have been felt over the course of a full fiscal year.
In short, even the things about which Wall Street analysts and investors are bullish might become cause for concern within the next year. Analysts seem to view theme park and Disney+ subscriber growth as givens, but that may not have a concrete basis in reality. None of this is to say Disney’s stock is “doomed” or the company is in financial peril—far from it—but there could be a stronger bear case than meets the eye here. Suffice to say, 2023 might be a rough year for Bob Chapek as Disney CEO (assuming he lasts the year), and probably not how the company wanted to start “celebrating” Disney’s 100th Anniversary.
Did you listen to Disney CEO Bob Chapek’s statements during the fourth quarter earnings call? Thoughts on anything he said–or didn’t say? Are you bullish or bearish about Disney’s financial future? Agree or disagree with Jim Cramer that Chapek should be fired? Are you worried about the future of Walt Disney World, Disneyland, or the company in general? Think things will improve or get worse throughout this year? Do you agree or disagree with our assessment? Any questions we can help you answer? Hearing your feedback–even when you disagree with us–is both interesting to us and helpful to other readers, so please share your thoughts below in the comments!