Disney Q2 preview: Where next for Disney stock?

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Josh Warner
By : ,  Market Analyst

When will Disney release Q2 2022 earnings?

Disney is scheduled to publish earnings covering the second quarter of its financial year after US markets close on Wednesday May 11.

 

Disney Q2 earnings preview

Disney shares have fallen back below pre-pandemic levels in 2022 but is a strong recovery play as people return to its theme parks and experiences this year and its film and TV businesses driven by its world-renowned content continues to go from strength-to-strength.

Wall Street forecasts Disney will see revenue rise almost 29% year-on-year in the first quarter to $20.12 billion and that adjusted EPS will jump 49% to $1.18.

The significant improvement in profit will be driven by Disney’s Theme Parks, Experiences & Products division, which is set to remain in recovery mode this year as its activities built around socialising bounces back from the pandemic.

The unit’s revenue is set to jump 93% to $6.1 billion as people start flocking back to its parks, resorts and shows. Its US operations, where sales and profits both returned to pre-pandemic levels in the last quarter, are set to be the primary driver of growth with revenue expected to jump 151% to $4.4 billion. Its international parks and experiences, where the rebound from Covid-19 has taken longer, is expected to see revenue rise 61% to $570.7 million but is expected to have been hampered by Covid-19 disruption throughout the quarter, with the likes of Hong Kong being hit by fresh lockdowns.

The combination of better demand coupled with lower Covid-19 costs has prompted Wall Street to expect the division to report an operating profit of $1.6 billion in the second quarter compared to the $406.0 million loss seen during the tough times the year before.

There is thought to be a great deal of pent-up demand for Disney’s theme parks and experiences as people look to make up for lost time in 2022 and this will be the biggest catalyst for Disney going forward considering operating profits are forecast to rise 16-fold this year.

Meanwhile, the Media & Entertainment division that homes Disney’s streaming services, television networks and studios is expected to see revenue rise 11% year-on-year to $13.8 billion but see operating profit slide over 20% to $2.1 billion as it comes up against tough comparatives from last year.

The key prong of the division that drives profit is Disney’s linear television networks, which is forecast to see revenue grow 5.6% year-on-year to $6.9 billion in the second quarter. Operating profit is forecast to fall over 5.6% year-on-year to $2.5 billion.

However, the primary focus within this division will be subscriber growth for its Disney+ streaming service. Disney+ is forecast to have added 4.3 million subscribers in the second quarter to end the period with 134.1 million of them on its books. That would be welcomed after the horror show for market leader Netflix last month, when it lost subscribers for the first time in over a decade and warned it would lose million more in the current quarter. However, while Disney+ is still attracting more users, analysts are expecting this to be one of the slowest quarters of subscriber growth on record.

Its other streaming services are also forecast to keep growing, albeit at a slower rate than we have seen during the pandemic in recent years. ESPN+ is expected to have added 1.22 million subscribers in the period to end the second quarter with 22.5 million in total, while Hulu’s subscriber base is forecast to grow by 1.27 million to 46.6 million.

Notably, its Direct-to-Consumer division that homes its streaming services is expected to remain in the red and deliver an operating loss of $520.2 million compared to the $290.0 million loss booked the year before. Disney continues to ramp-up spending on programming and expanding into new territories as it is focused on growing its user base. For example, programming and production costs for its DTC unit are increasing by $800 million to $1 billion and by another $500 million for its linear TV networks as the sporting calendar normalises.

There are theories that streaming services will increasingly turn to ad-supported models going forward to help reinvigorate growth, although Disney may be able to wait longer before pulling any such lever considering its ongoing expansion and its bumper content slate could provide catalysts this year. It has two Star Wars series out this month and two new Marvel ones to follow later this year, alongside other major titles such as a live-action remake of Pinocchio.

Notably, Wall Street currently believes the marked slowdown in the second quarter will improve in the third, when it believes Disney+ can add 12.9 million subscribers. In fact, analysts think Disney+ will add over 44 million subscribers this year as a whole and end 2022 with 162.5 million. The company is aiming to have 230 million to 260 million Disney+ subscribers by the end of its 2024 financial year.

 

Where next for DIS stock?

It has been a volatile ride for Disney shares over the past two years. It took just nine months for Disney shares to recover their pandemic-induced losses in 2020 and it swiftly went on to hit record highs of $203 in March 2021. The stock then struggled to find higher ground for the rest of the year and shares have now been stuck in a downtrend for the past six months, with the stock now back below where they sat before the Covid-19 crisis erupted.

The latest leg of the downtrend has pushed Disney shares to a 21-month low at $110. We could see the stock slide to the $108 level of resistance-turned-support seen in mid-2020 if the current downtrend persists. That floor needs to hold to avoid opening the door to sub-$100 for the first time in almost two years.

However, there are multiple signs that a reversal could be on the cards. The RSI has been pushed into oversold territory and we have seen this diverge from the share price over the last five months, with the indicator finding higher ground whilst the stock has sunk lower. That suggests the current downtrend is losing momentum and is reinforced by the fact trading volumes have seen a notable decline over the past five days.

We could see shares swiftly recover toward $130 if it can turn its fortunes around. It can then try to recapture the 50-day moving average before eyeing the $135 level of resistance seen back in September 2020. From there, the 100-day sma at $140 and the 200-day sma at $155 come back onto the radar. The 34 brokers that cover Disney see even greater upside potential over the next 12 months with an average target price of $183.

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