The Walt Disney Company is set to unveil its Q4 financial results on Wednesday, February 8, after Wall Street's closing bell. The leading entertainment powerhouse is expected to post annual revenue growth, but earnings will probably suffer due to a significant decline in advertisement income and theme park activity. Once more, investors will focus on Disney streaming service’s net subscriptions, with Netflix’s better-than-expected subscriber figure in Q4 providing a positive early indication.

Persistent underperformance

In the past few years, Disney intensified its diversification efforts to be able to perform well during different economic cycles and market conditions. The success of its streaming business provided significant income streams when the company was forced to shut down its theme parks after the Covid-19 outbreak, whereas the strong rebound of its theatres and resorts has partially offset the post-pandemic slowdown of its media division. However, investors seem to be sceptical about the profitability of the firm and whether its two leading segments have further upside potential as the streaming sector seems saturated, while large queues in its on-site activities seem to have dissatisfied consumers.

These looming fears of a broader deceleration in its major businesses have been reflected in the share price performance, with the stock losing significant ground in 2022 and even closing beneath its pandemic lows before recouping some losses. Moreover, in the upcoming months, the global economy is likely to dip into a recession, which could curtail consumers’ spending on discretionary items like amusement parks and leisure trips. In the case that this adverse scenario materialises, the share’s recent advance could be erased.

Q4 earnings season highlights

There are a lot of emerging themes in Disney's upcoming earnings report that investors should pay close attention to. Firstly, the company is expected to post a whopping 36% annual decline on its ad revenue, following the fate of other tech giants such as Alphabet and Meta. This division is very crucial for Disney as it has large profit margins, which enable the firm to redistribute a significant part of its income streams for the enchancement of more substantial business segments such as the streaming platforms.

Speaking about the streaming segment, Netflix smashed all expectations by reporting 7.66 million net subscriber additions for the fourth quarter. Therefore, a large miss or disappointing growth in Disney’s figure would essentially mean substantial underperformance against its major competitor and consequently lead to losses for the stock price. Especially, if we consider that Disney exceeded Netflix's subscriber growth in the previous two consecutive quarters.

Finally, the firm is likely to reconsider the efficacy of its on-site business as more and more visitors express their grievances for the large waiting time and the expensive prices, which led to a decrease in the firm’s theme park revenue relative to the same quarter last year.

Mixed fundamental picture

Disney is expected to exhibit solid revenue figures, albeit profits will probably drop as the company has been investing huge amounts of money for its business restructuring. The world's leading entertainment conglomerate is anticipated to post revenue of $23.58 billion for the fourth quarter, according to consensus estimates by Refinitiv IBES, which would represent a year-on-year growth of 7.06%. On the contrary, earnings per share (EPS) are projected at $0.79, marking a 25.76% drop against the same quarter last year.

Still overvalued?

Disney has been facing a slowdown in its on-site activities and fierce competition within the streaming sector, causing its share price to decline substantially. However, the leading entertainment firm still retains a hefty forward price to earnings multiple of 25.1x, which is substantially higher than those of the S&P 500 and Nasdaq 100.  This ratio denotes the dollar amount someone would need to invest to receive back one dollar in annual earnings – the higher it is, the more 'expensive' the stock.

Can the share price extend its rebound?

Disney's share price has been in a sustained downtrend since early 2021, closing at its lowest level in eight years.  However, the stock managed to stage a significant rebound crossing above both its 50- and 200-day simple moving averages (SMAs).

In the bullish scenario, solid financials could propel the price towards the September peak of $117.50. Even higher, the August high of $126.50 could come under examination.

On the flipside, the bears might aim for the $107.00 hurdle, a violation of which could turn the spotlight to the October low of $91.00.