MARKET

Disney’s stock has been stuck. Answering this question could get it going again.

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Walt Disney Co.’s stock has been stuck in a rut lately, and investor sentiment is at “an all-time low,” according to MoffettNathanson analyst Michael Nathanson.

And with the stock’s recent history, it’s easy to see why: Disney shares
DIS,
+1.16%

have fallen 21% over the past five years, as the S&P 500
SPX
has advanced 84%. The stock posted its first annual gain in three years in 2023, but that 4% rise paled in comparison to the S&P 500’s 24% charge higher.

Disney’s story also has a lot of moving parts. On the media side alone, the company is preparing an ultimate move of its ESPN flagship service to the streaming world and waiting for final determination on price as it moves to acquire Comcast Corp.’s
CMCSA,
-0.82%

one-third stake in Hulu.

See also: Disney is bringing back its dividend after cutting it at start of the pandemic

But Nathanson thinks investors need more confidence in the long-term margin potential of streaming broadly. “Of all the priorities, we strongly believe the most important thing on this long list must be addressing Disney’s cloudy [direct-to-consumer] future,” he wrote in a Thursday note.

While ESPN gets a lot of buzz, Nathanson is taking a big picture look at Disney’s streaming business and forecasts that it’s losing $2.4 billion a year when he backs out his assumptions for the Hulu Live TV business. All the while, the business is bringing in about $15 billion in revenue. When Netflix was at a similar revenue point back in 2018, the company was seeing $1.6 billion in profits, he noted.

“Of course, times and business models are different, but we are left wondering how and why Disney can have a business that is $4 billion less profitable,” Nathanson wrote. He asked whether Disney was pouring too much money into content, or into subscriber acquisition. Or perhaps there is “just a basic disconnect between revenue and expenses that can only be rectified by both continued price hikes and base cost cuts?”

In his view, questions about the broader margin story in streaming are keeping Disney’s stock in check.

“Sure, getting to break-even in the back of FY 2024 is nice, but what is the long-term margin potential of these assets?” Nathanson asked. “While we model only 5% in 2025, there is too much ambiguity for the market — and us — to know if that is right.”

Whether Disney’s management has the clarity Wall Street needs — and is willing to share it — remains an open question, however.

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