Despite various challenges, the entertainment industry is growing due to the adoption of advanced technologies, improvement in user experiences, and analysis into consumer behavior. Moreover, the growing penetration of the internet, entry into newer geographies, and addition of new content boost its outlook.
Therefore, investors should consider waiting for a better entry point in The Walt Disney Company (DIS). On the other hand, given its poor fundamentals and growth prospects, avoiding Paramount Global (PARA) could be prudent.
Before diving deeper into their fundamentals, let’s discuss what’s shaping the prospects of the entertainment industry.
The entertainment industry continues to face significant challenges, including rising costs, growing competition, and high debt burdens. They are undertaking frequent layoffs to cut costs.
However, streaming companies are undertaking restructuring plans that aim to enhance long-term competitiveness through investment in content, suggesting potential for recovery. Streaming companies are resorting to measures such as higher monthly subscription plans, ad-supported tiers, etc., to boost their profitability.
Entry into newer geographical territories and investment in local content will also help drive the growth of streaming companies. The rising demand for improved streaming services, fueled by high-quality videos, drives the growth of the global media and entertainment market.
The media and entertainment market reached an estimated $27.72 billion this year and is projected to grow at a CAGR of 7.8%, reaching $40.36 billion by 2029.
The entertainment industry is evolving to match consumer preferences, leveraging digital tools and technology for creativity, flexibility, and cost-effective offerings. The use of AI in the media and entertainment market is projected to hit $17.65 billion in 2024, growing at a 28% CAGR.
Moreover, technological progress is reshaping film production and distribution. Augmented reality (AR) and virtual reality (VR) content capture interest, while AI tools such as machine learning and natural language processing refine content and provide personalized recommendations to engage audiences. The global movie theatre market is projected to reach $93.40 billion by 2028, growing at a 4.4% CAGR.
Let’s take a look at the fundamentals of the two entertainment stocks.
Stock to Hold:
The Walt Disney Company (DIS)
DIS operates as an entertainment company worldwide. The company engages in film and episodic television content production and distribution activities. It operates through two segments: Disney Media and Entertainment Distribution; and Disney Parks, Experiences, and Products.
In terms of the trailing-12-month EBIT margin, DIS’s 11.57% is 39.2% higher than the 8.31% industry average. Likewise, its 5.72% trailing-12-month Capex/Sales is 45.4% higher than the industry average of 3.93%.
However, the stock’s 17.54% trailing-12-month EBITDA margin is 6% lower than the industry average of 18.65%. Also, its 0.44x trailing-12-month asset turnover ratio is 9.5% lower than the 0.49x industry average.
For the first quarter that ended December 30, 2023, DIS’s revenues rose marginally year-over-year to $23.55 billion. Its total segment operating income came in at $3.88 billion, up 27.4% over the prior-year quarter. The company’s net income attributable to DIS rose 49.4% year-over-year to $1.91 billion. In addition, its EPS rose 48.6% from the year-ago value to $1.04.
On the other hand, its Entertainment revenues declined 6.5% year-over-year to $9.98 billion. Its cash, cash equivalents and restricted cash, end of the period fell 14.9% year-over-year to $7.25 billion.
Analysts expect DIS’s EPS and revenue for the quarter ending March 31, 2024, to increase 14.1% and 1.7% year-over-year to $1.06 and $22.18 billion, respectively. It surpassed the Street EPS estimates in three of the trailing quarters. Over the past month, the stock has gained 1.9% to close the last trading session at $112.50.
DIS’s bleak fundamentals are reflected in its POWR Ratings. It has an overall rating of C, equating to a Neutral in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has a C grade for Stability. Within the Entertainment – Media Producers industry, it is ranked #8 out of 11 stocks. In total, we rate DIS on eight different levels. Beyond what we stated above, we also have given DIS grades for Growth, Value, Momentum, Sentiment, and Quality. Get all the DIS ratings here.
Stock to Sell:
Paramount Global (PARA)
PARA operates as a media, streaming, and entertainment company worldwide. It operates through TV Media, Direct-to-Consumer, and Filmed Entertainment segments.
In terms of the trailing-12-month gross profit margin, PARA’s 32.49% is 33.8% lower than the 49.07% industry average. Likewise, its 7.39% trailing-12-month EBITDA margin is 60.4% lower than the industry average of 18.65%. Additionally, the stock’s 6.26% trailing-12-month EBIT margin is 24.8% lower than the industry average of 8.31%.
PARA’s revenue for the fourth quarter which ended December 31, 2023, decreased 6.1% year-over-year to $7.64 billion. Its adjusted OIBDA came in at $520 million, down 15.3% year-over-year. In addition, its adjusted net loss and adjusted diluted EPS from continuing operations attributable to PARA declined 40.6% and 50% over the prior-year quarter to $41 million and $0.04, respectively.
Street expects PARA’s revenue for the quarter ending June 30, 2024, to decrease 1.7% year-over-year to $7.48 billion. Over the past year, PARA’s stock has declined 40% to close the last trading session at $11.63.
PARA’s grim outlook justifies its overall rating of D, which translates to a Sell in our proprietary POWR Ratings system.
It is ranked #9 in the same industry. It has a D grade for Momentum, Stability, and Sentiment. Click here to see PARA’s ratings for Growth, Value, and Quality.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
DIS shares rose $0.17 (+0.15%) in premarket trading Thursday. Year-to-date, DIS has gained 24.79%, versus a 8.84% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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