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Disney's Stock Takes a Dive Amid Streaming Business Struggles

Disney (DIS) faced a significant setback on Tuesday as it reported a noteworthy development in its streaming business.

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Challenges in Achieving Streaming Profitability
While the company announced that a crucial segment of its streaming operations turned profitable for the first time, it also projected weaker performance for the current quarter, prompting a nearly 10% drop in its stock during early trading.
The forecast underscores Disney's ongoing challenges in achieving consistent profitability in streaming, a critical focus area as its traditional linear TV business faces decline. Despite recent optimism among investors due to CEO Bob Iger's turnaround efforts, the company's stock took a hit following this announcement. This setback comes just after Disney's recent victory in a high-profile proxy battle against activist investor Nelson Peltz.

Mixed Results in Q2
In Disney's fiscal second quarter, the direct-to-consumer (DTC) segment of its entertainment division, which includes Disney+ and Hulu, reported operating income of $47 million, marking a significant improvement from a loss of $587 million in the same period last year.

However, Disney anticipates a return to losses in the DTC segment of its entertainment division in the third quarter, driven by losses from its Indian brand, Disney+ Hotstar. Furthermore, not all of Disney's streaming services were profitable in Q2, as total direct-to-consumer losses, including ESPN+, amounted to $18 million compared to a loss of $659 million in the prior-year period. The company aims for full streaming profitability by the fourth quarter of this year.

Financial Performance and Guidance
Despite these challenges, Disney reported adjusted earnings of $1.21 per share for Q2, beating analysts' expectations of $1.10. Revenue stood at $22.1 billion, meeting consensus expectations and reflecting positive growth compared to the previous year.

Disney also raised its guidance for full-year adjusted earnings growth to 25%, up from the prior 20%. However, the company incurred an impairment charge of over $2 billion after merging its Star India business with Reliance Industries.

Following the Q2 results, KeyBanc analyst Brandon Nispel noted that the soft guidance for entertainment streaming in the next quarter might dampen enthusiasm. Nevertheless, he emphasized that Disney's ongoing turnaround efforts, led by CEO Bob Iger, remain on track.

In addition to its streaming business, Disney's theme parks segment delivered strong results, with domestic operating income increasing to $1.61 billion. However, domestic operating income at ESPN fell 9% year over year, primarily due to lower affiliate revenue and a decline in subscribers.

Looking ahead, Disney aims to move its streaming business into profitability by fiscal year 2025, despite potential short-term challenges. Despite the stock's decline, investors may see this as an opportunity to acquire shares of the entertainment giant at a discounted price.

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