Why investors aren’t thrilled with Disney’s Q3 results despite first streaming profit

Walt Disney (DIS 0.57%) the stock is down 5% this year as investors worry about the company’s future growth prospects. And that’s even though Disney is coming off an encouraging quarter in which it posted a profit from its streaming business earlier than expected.

It should have been a positive surprise, potentially sparking a rally for stocks, but it wasn’t. Why are investors bearish on the company’s performance and the weakness in the stock’s valuation makes now a good time to add the entertainment stock to your portfolio?

Disney’s direct-to-consumer streaming business is now profitable

Disney reported earnings this month, and revenue for the period ended June 29 rose 4 percent to $23.2 billion, coming in slightly better than analysts’ expectations of $23.1 billion. The company’s adjusted earnings per share of $1.39 also significantly beat Wall Street estimates of $1.19.

The biggest positive for the business was that its direct-to-consumer (DTC) streaming segment, which includes Disney+, is now profitable. Its sales rose 15% to $6.4 billion and it posted a profit of $47 million, compared to a loss of $512 million in the year-ago period. The company did not expect to be profitable until next quarter.

Positive surprises are usually catalysts that can send the stock price higher. Instead, there was a subdued reaction from the market to this recent news.

Why aren’t these results good enough to get investors excited about the stock?

While it was great news that Disney’s streaming business is moving in the right direction, the experiences segment is far more important to the company. Of the $4.2 billion in operating income that Disney generated from its segments last quarter (entertainment, sports and experiences), experiences brought in the largest portion, with operating income totaling $2.2 billion. Entertainment, which includes the streaming business, totaled $1.2 billion, followed by sports at $802 million.

And the experiences segment, which includes Disney theme parks, is the biggest cause of concern for the company. If the economy goes into recession next year, traffic to the Disney theme parks could be disappointing. Revenue from experiences grew just 2% year-over-year last quarter, and things may not improve much anytime soon.

When discussing the experiences segment, management noted that “the moderation in demand we saw in our domestic businesses in Q3 could impact the next few quarters.” The company also expects the segment’s operating income for the current quarter to decline by single digits compared to the prior year.

While operating profit from the DTC streaming business was positive, when you consider that it only totaled $47 million, it’s a pretty modest portion of Disney’s overall operating profit. Ultimately, it’s the success of the theme park business that will likely dictate where the stock goes.

Is Disney stock a good value buy right now?

Disney’s stock has been reeling lately, and much of that is due to the worrisome outlook for the economy and what that could mean for the company going forward. If there is indeed a recession next year, Disney’s financial statements could come under more pressure and worse results could follow.

But if you’re willing to stick around for the long haul, the stock may be an attractive buy right now. It’s trading at 16 times forward earnings (based on analyst expectations) and its price-to-earnings growth ratio is just 0.40, indicating that there’s great value here based on potential growth prospects over the long term long of the company.

The near-term could prove volatile for Disney, but with a strong brand, popular theme parks and now a lucrative DTC streaming business, plus a modest valuation, there’s reason to remain bullish on the stock if you’re willing to be patient and just buy and keep.