Disney Stock Still Up on Iger's Return. Will It Last?

It's been several days since Disney (DIS, $96.21) shocked the media and entertainment industry, not to mention the entire investment community, with news that former CEO Bob Iger was rejoining the company, ending Bob Chapek's two-year run in the top job. Disney stock opened Monday trading up 10% on the news. 

It has since lost some of those gains, but the company's share price remains up on the week, reversing weakness following its latest earnings report.

The ouster of Chapek, while shocking, really shouldn't have come as a surprise to anyone.

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Jim Cramer, CNBC's "Mad Money" host, suggested Chapek should be fired on November 9.

"Disney, they have ESPN. If we were on ESPN, we would say he's got to be fired. That's pretty cut and dry," Cramer said on CNBC's business news program "Squawk Box"' Wednesday morning. "The losses here are just mind-boggling. When you're going over the quarter, it's stunning."

Cramer highlighted the company's $1.5 billion loss from Disney+ as a big reason Chapek was no longer fit to lead the House that Walt Built.

And while Disney's stock may be up this week, what doesn't make sense is why the Disney board felt compelled to bring back Iger to clean up a mess he made.

While virtually anyone with extensive media and entertainment experience would fit the bill, the board chose to bring back a 71-year-old man to fix what might not be fixable.

Disney shareholders appear to be happy about the move – as do many investment professionals including Cramer – but as the saying goes, be careful what you wish for.

Iger's chances of success aren't a shoo-in. Here's why.

Disney Stock Needs Disney+ Profitability

As Chapek pointed out in Disney's fiscal Q4 2022 earnings, the Disney+ platform added 12.1 million subscribers over the three-month period ended Oct. 1. However, that includes Disney+ Hotstar, a bundled service that includes Hulu and ESPN+. So if you exclude this part of its business, the Disney+ increase over the third quarter was 9.3 million, or 9.9% higher quarter-over-quarter.

If it continues to grow Disney+ subscribers by 10% a quarter, it will take seven quarters to reach 200 million subscribers worldwide. Netflix (NFLX), which has been streaming video since 2007, grew its global subscriber base in Q3 2022 by 4.5%, to 223 million.

Netflix took 19 years to get to 200 million subscribers. If Disney keeps up 10% quarterly growth, it will have achieved this feat in 4.5 years, less than one-quarter of the time it took Netflix.

Now, granted, the video streaming landscape has become much more competitive since Reed Hastings made the call to go to streaming nearly two decades ago.

And that makes Disney+'s profitability even more elusive than ever.

As mentioned earlier, Disney+ and the rest of its direct-to-consumer business lost $1.5 billion in the fourth quarter. It lost a little more than $4 billion for the entire fiscal year, with Disney+ accounting for a lion's share.

If Iger's not careful, those losses could double in no time, knocking its goal of profitability goal in fiscal 2024 out the window.

 Iger's Got 2 Years to Right the Ship

As the press release stated, Iger will serve as Disney CEO for two years. He's got 24 months to right the ship and find a successor.

If you recall, Chapek was officially named CEO on Feb. 25, 2020. At the time, Chapek was chairman of Disney Parks, Experiences and Products business.

Bob Iger stated about Chapek's appointment in the press release at the time:

"His success over the past 27 years reflects his visionary leadership and the strong business growth and stellar results he has consistently achieved in his roles at Parks, Consumer Products and the Studio."

Iger had plenty of time to select a successor. He botched it. Now he's got just 24 months to get it right. What could go wrong?

One interesting possibility is for Disney to acquire Candle Media. It was launched in 2021 by former Disney executives Kevin Mayer and Tom Staggs with $2 billion in backing from Blackstone. Candle's been on an acquisition binge ever since.

Mayer and Staggs could co-run Disney like Michael Eisner and Frank Wells did in the 1980s. 

There are plenty of things that need attention at Disney but none is more important than fine-tuning the company's streaming strategy. First, it needs to widen the content it puts on Disney+. If it doesn't, it's hard to see it reaching its goals for subscribers or profitability.

Iger gets all the credit for launching Disney+ in 2019. Now it's up to him to make it more profitable. That's no sure thing.

They say you can't put the genie back in the bottle. But, unfortunately, Disney's attempting to do just that. Shareholders shouldn't rejoice this move. It could easily backfire.