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Disney Shares Rise After Recording 66% Profit Drop

The Walt Disney Co. (NYSE:DIS) recently came out with its fourth quarter results. The Burbank California-based entertainment company came out with massive profit decline, mostly because of its online ventures. The bottom line drop seems to have been ignored by Wall Street as Disney launches its own online streaming product, Disney+.

For the quarter, Disney reported a 34% rise in revenue due to the integration of its $71 billion 20th Century Fox acquisition (Disney closed its Fox deal on March) and multibillion blockbuster successes such as "The Lion King" and "Aladdin." Also, Disney reported strong profits in its Parks and Resorts business.


However, the entertainment company reported significant profit declines in its online projects. Disney's Direct-to-Consumer & International business, which includes a 60% stake in Hulu, ESPN+ and Disney+, recorded a $740 million loss in the fourth quarter alone, amounting to $1.8 billion in losses so far for the fiscal year. The media giant reported an 85% decline in free cash flow for the year, down to $1.1 billion from $9.8 billion a year ago.

Despite this drastic bottom line drop, analysts even became more bullish on Disney, and some even suggested that the company's fourth quarter results are a "non-event." Disney carries a healthy balance sheet despite its recent acquisition of 20th Century Fox, with $5.4 billion in cash, $47 billion in debt and a book value of $94 billion.

Disney's major project at the moment, Disney+, has become a recent hit among analysts, who widely predict its future success in gathering subscribers to turn a profit despite costing the company quite a lot in the development stage. The subscription price of $6.99 per month is as competitive as it could be, and the service's offerings will include a bunch of Marvel and Disney movies. Research firm MoffettNathanson projects Disney+ to gain at least 2 million subscribers by the end of this year and up to 10 million for 2020. Disney itself sees subscribers growing to 60 to 90 million by 2024.

Disney's acquisition of Fox could not have been better timed, as cash flow from the acquisition has helped keep Disney's profits in the green. Meanwhile, Disney's venture into online direct-to-consumer streaming has already exhibited signifiant capital burn, and overall profitability is not expected to return until 2024. This is important to take note as Disney's other online streaming service, Hulu, is projected to record an operating loss of $1.7 billion in the coming fiscal year.

At $138 a share, Disney now trades at 22 times forward earnings compared to its historical average of 17 times. Analyst estimates, meanwhile, have an average price target of $154.45 a share.

Meanwhile, investors may want to just hold on to their Disney stock instead of adding up during this capital intensive period, unless of course there is a good share price pullback in the near future.

Disclosure: Long Disney.

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This article first appeared on GuruFocus.