Disney Stock Drops Following Revenue Miss. Time to Buy the Dip?

Key Points

• Disney's fiscal third-quarter results weren't that bad.

• While revenue missed estimates, major announcements about streaming provided momentum.

• Fourth-quarter guidance seems to imply that things can keep moving in the right direction.

• 10 stocks we like better than Walt Disney ›

Even after reporting a quarter with great results for parks and streaming, Walt Disney (NYSE: DIS) is down 4% this week. Over the last few years, Disney has underwhelmed on top-line revenue growth. Subsequently, the stock has underperformed the broader market over the last five years. The company announced a lot of news in its most recent quarterly earnings results, but it's down after reporting a miss on revenue. So, is this the time to hop into the game? I say yes.

One of the headaches for Disney has been balancing its different segments. Traditional media is struggling, whereas its streaming and films are doing well, and it just had a great quarter for parks.

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Image source: Getty Images.

Most recently, streaming and parks seem to be bridging the gap created by the weakness in traditional television. In all, revenues came in at $23.65 billion for the fiscal third quarter, versus expectations of $23.73 billion. This appears to be what held the stock up after reporting strong earnings.

Net income for the quarter came in at $5.26 billion, which is a stark change from the $2.62 billion that Disney reported a year ago. This breaks down to $2.92 per share. On an adjusted basis, earnings were $1.61, due to the company procuring Comcast's (NASDAQ: CMCSA) final stake in Hulu.

While earnings tend to be the focal point of quarterly results, the big news coming out of the entertainment titan's quarterly release was actually that it would be consolidating its streaming services. Hulu will be phased out and become part of Disney+, and the company is launching a bundle service that will include ESPN+.

Overall, I am encouraged by Disney's consolidation and expansion of digital offerings, because Disney makes the content necessary to do it right. When you consider competitors, so much more of their content is rented from outside sources. For instance, Netflix (NASDAQ: NFLX) does make its own shows and films, but it also relies heavily on outside sources. Disney is much more focused on its own material.

What's very interesting is the seeming resilience of the consumer. In an interview with CNBC, CFO Hugh Johnston noted that Walt Disney World had the biggest third quarter ever, with traffic remaining strong. This is in contrast to many concerns lately about consumer spending power. Revenue for the experiences segment of the business saw an 8% increase year over year to $9.09 billion in all. That hardly feeds the narrative that consumers are slowing down.

The real problem spot for Disney seems to be traditional TV. While Disney's entertainment segment, which includes its streaming, TV networks, and films, saw revenues increase 1%, it was largely weighed down by regular TV, which reported a 15% decline in revenue.

If parks remain strong -- and Disney seems confident that they will, since it's planning a new park in the United Arab Emirates -- then I see potential in this stock. Its growing strength within streaming should be enough to offset a weaker overall audience on traditional TV. In many ways, it's simply trading one form of content delivery for another. I also think it benefits the company that its content library caters to a wide demographic. Shows on FX have more adult-themed content, while Disney's large library of kids' films and TV shows cover the other end of the spectrum.

The ESPN business is also in the process of attempting to buy assets from the NFL, including the NFL network, which would greatly strengthen the appeal of its streaming service once it launches.

Looking ahead, Disney is anticipating a 10-million-user increase for its Disney+ and Hulu subscriptions in the fourth quarter. Full-year adjusted earnings per share are expected to increase 18% over fiscal 2024 to $5.85, and sports are expected to see an 18% increase in operating income. Yes, this is a company that has had a slow couple of years, but the magic is still in Disney, and its growing position within streaming makes it a compelling choice for those with the patience to let this one play out.

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David Butler 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 Comcast. The Motley Fool has a disclosure policy.