Disney’s share price is surging in after-hours trading on Wednesday after the company reported better than expected earnings for the previous quarter. Earnings per share rose to $1.04 compared to $0.70 a year ago, which suggests that the company is becoming more profitable, and investors are cheering this development.
Revenues for the quarter were $23.5bn, and the company also announced significant cost reductions across its business lines, with $500mn trimmed from costs last quarter. The good news did not end there, perhaps the most important announcement in this earnings report was the news that the company expects to reach profitability in its Disney + and other streaming businesses in the fourth quarter of fiscal 2024, which is the end of September. The company reported that last quarter, its Entertainment DIC business saw operating losses narrow by nearly $300mn vs the prior quarter.
Subscriber growth was mixed, for example Hulu increased subscribers by 1.2mn compared to the previous quarter, while Disney + core subscribers fell by 1.3mn compared to the prior quarter. Investors are happy to let this piece of news slip, as they had guided the market on this possibility after a substantial cost increase. However, it does seem that the subscribers Disney has lost, may have signed up to Netflix, who saw a massive surge in subscribers last quarter. But Disney doesn’t expect to lose subscribers for long. It gave a bullish forecast for subscriber growth, it expects net additions of between 5.5 and 6 mn in the next quarter. This is an ambitious target, and one that could be hard to achieve in a very crowded and competitive space.
Disney makes Epic move into gaming
But, while Disney works on its streaming service, it has also taken a $1.5bn stake in Epic, to work with the Fortnite maker to generate new content. So, Disney has also expanded into the lucrative gaming market, which should also attract lots of new, young customers.
Can profitability rise without cost cutting?
Bob Iger’s strategy to turn around the ship seems to be working. Part of the increase in profitability is down to brutal cost cutting, and there is only so much that you can do. If Disney + doesn’t see the subscriber growth that Iger hopes for, then it’s hard to see how the company’s streaming business can be a ‘key growth driver for the company’. But for investors, that is the next quarter’s problem.
Iger must have some surprises up his sleeve for the rest of this year, because he also delivered stellar forward guidance. The company now sees full year fiscal 2024 EPS to rise by 20% compared to 2023, at $4.60. It is projecting free cash flow this year of approx. $8bn, and it is on track to reach the $7.5bn of annualized savings targeted for this year.
Disney has followed the Meta and Big Oil playbook and has also announced a $3bn share buyback programme for 2024, and it declared a cash dividend of $0.45 per share, an increase of 50% compared with the dividend paid in January. This news is likely to prop up the share price, as the dividend won’t be paid until July. The plentiful free cash flow projections means that there could be more shareholder sweeteners to come, which is adding to Disney’s attractiveness.
There isn’t much to complain about when it comes to this earnings release. It also announced that it would launch its direct-to-consumer streaming service for ESPN in the autumn. This news comes after it said that ESPN would also start offering a ‘skinny sports bundle’, which is one way to attract new subscribers and boost the size of its streaming business. This could be another blow to the cable networks, as it will be the first time that ESPN will be available to non-cable subscribers.
Armed with the right goods
If only ARM had listed in the UK instead of Nasdaq. The British semiconductor and software designer has seen its shares jump by more than 30% in afterhours trading, after it gave a stellar forecast for earnings for this year. It now expects Q1 revenues to top $850 – $900mn, which is significantly better than analyst estimates of $778mn. Revenue for 2024 as a whole is expected to come in at $3.16- $3.21bn, analysts expected $3.02bn. Operating expenses are also lower than analysts’ expectations at $1.70bn, vs. $1.75bn expected. EPS is now forecast to be $1.20 – $1.24 for this year, analysts had expected $1.05. The market loves it when the companies are expected to be more profitable than analysts expect, and this is why we have seen a massive jump in Arm’s share price.
PayPal fails to deliver
Elsewhere, PayPal’s share price has declined in afterhours trading, after it provided the market with weaker forward guidance than anticipated, which is a cardinal sin for this earnings season. It sees EPS for 2024 at $5.10, the estimate was for a reading of $5.49. Free cash flow is also expected to be lower than estimated at $5bn, the market had been looking for $6.19bn. For Q4, EPS came in at $1.48, vs. $1.36 expected. Operating margins were also stronger than analysts thought at 23.3%, vs. 22% expected. Total payment volume was $409.83bn, 15% higher than a year ago, and payment transactions were up 13% YoY. Companies are not getting away with weak forward guidance right now, and that is why PayPal’s share price is falling, even though they posted decent earnings for Q4.
S&P 500 eyes key 5,000 technical level
Overall, these earnings reports are likely to cheer the market, even though PayPal has slipped up. The Disney results were a nice surprise for such a market stalwart. Earnings reports have improved as we have progressed through earnings season. According to FactSet, the S&P 500 is now reporting YoY earnings growth for last quarter. After falling to -1.8% on January 19th, the S&P 500 is now reporting YoY earnings growth of 1.6%. At the start of earnings season, a spate of poor reports from US banks had weighed on earnings growth, however, now that the 10 other sectors have mostly reported earnings, the picture has brightened. The increase in earnings YoY has been led by the tech sector, energy, healthcare and consumer discretionary sectors, which suggests that positive earnings growth can be attributed to a number of sectors. Does this mean that it is time for the rest of the stock market to play catch up with tech? A strong earnings season across a broad range of sectors could be the trigger that is needed to help the equal weighted S&P 500 play catch up with the market weighted index. The chart below shows the market weighted SPX (white line) and the equal weighted SPX, which strips out the effects of mega tech. This chart has been normalized to show how both indices move together. The equal weighted index has lagged the market weighted headline SPX index since March 2023.
