Hello everyone, and welcome to this professional U.S. stock channel, which, despite originally planning three updates a week, seems to be going full attendance this week. Today, we'll dive deep into a highly anticipated value stock: **Disney**. The company released its earnings report during Thursday's trading session. Although the stock price fell at market close on Thursday, I personally believe its fundamentals are continuously improving, and its current valuation is quite reasonable, even somewhat undervalued. Later, I will provide a detailed analysis of this earnings report and update my valuation for Disney.

Before we get into the earnings, let's discuss the current market. On Thursday, asset price trends showed some volatility in the U.S. dollar and Treasury bonds, with comments from Federal Reserve members also having an impact. Recently, I haven't updated much on macroeconomics and the Federal Reserve because, frankly, I view the Fed's actions more as market background noise. For instance, when the market rebounded on Monday, many attributed it to the positive news of the U.S. government "reopening," but then the U.S. stock market fell again in the following two days. This illustrates that the market always tries to find reasons after the fact, attempting to derive causes from outcomes. These reasons often fail to consistently explain future price movements, thus offering limited reference value. Whether the U.S. government is open or not, it's largely market noise for stock price trends.

The prevailing market narrative currently is that valuations are high, and there's a debate about whether **AI** (Artificial Intelligence) has a bubble, leading to a pure "valuation kill" phenomenon. Stocks that performed exceptionally well previously were not spared in Thursday's market downturn. This reaffirms my view: no matter how strong a company's fundamentals are, once its stock price is driven by significant sentiment and speculative capital, it can easily fall by 20% to 30%, or even 40% to 50% from its peak.

Indeed, the market experienced a significant decline on Thursday, with the spread on junk bonds rising by 8 basis points. The three major indices were primarily led lower by large-cap tech stocks; the S&P 500 fell by 1.7%, the Nasdaq by 2.3%, and the Dow Jones by 1.7%. Looking at sector performance, defensive sectors such as consumer staples (barely fell), energy (up 0.3%), healthcare (very small decline), and insurance (up 0.2%) showed relative strength. Earlier, leading large-cap tech stocks fell by 2.7%, and the equal-weighted index also dropped by 1.1%, indicating a broad-based decline on Thursday, yet defensive sectors remained resilient.

In terms of market participation, 129 companies in the S&P 500 rose, while 371 fell, meaning approximately 70% of companies experienced a decline. The Nasdaq performed even weaker, with only about 600 out of over 3,000 companies rising, which is less than 20%, while the remaining 80% fell. However, the magnitude of the decline in participation wasn't that large, which might suggest there's still room for further adjustment in the market. Despite Thursday's decline, 47% of S&P 500 stocks were still above their 20-day moving average, and 44% were above their 5-day moving average. The Nasdaq was relatively weaker, with both moving averages covering only 31% of its stocks.

As early as the beginning of the year, I started discussing the concept of **Beta Coefficient** (Beta Coefficient: a measure of the volatility of a portfolio or individual stock in relation to the overall market) and when one should "lower beta" or "raise beta." Today, I saw two prominent figures on **X** (X: formerly Twitter social media platform) also discussing this topic. One of them, James, mentioned that if a few weeks ago you were gloating about your stock rising 200% or even 400% in just a few months, but now you're wondering why it suddenly dropped 35%, while the overall market only fell 2% from its peak, then you might need to deeply understand the Beta Coefficient.

The Beta Coefficient measures the volatility of your investment portfolio or individual stock relative to the S&P 500 index. Investing in highly volatile stocks can be exhilarating when they rise, but equally painful when they fall. A crucial point is: even if your asset rises by 100% (doubles), a 50% drop from its peak will wipe out all your previous gains. This is not an equal decline; a 100% rise only requires a 50% fall to return to zero. If it falls 20% from its peak, you might feel it's only a 20% drop, but it has actually erased 40% of your previous 100% gain. Therefore, understanding and managing your portfolio's Beta Coefficient is extremely important.

To help you understand your investment portfolio's Beta Coefficient, I recommend downloading my APP, which includes a free beta calculation function. You can download it by scanning the QR code on the screen or by searching "投资TALK君" in the Google/Apple stores. The APP also provides free indicators such as market participation and the CNN Fear & Greed Index. Please note that users in mainland China may need a VPN to access it.

Additionally, some viewers have recently inquired about the upcoming offline networking events in two West Coast cities (Los Angeles and Silicon Valley) next week. The Los Angeles events are on Thursday and Friday, and Silicon Valley's is on Saturday, totaling two sessions. I will personally attend to engage in purely offline discussions with everyone, free of charge. The registration link will be placed in the pinned comment, and I will confirm registrations via email three days before the event, so please keep an eye on your inbox.

Next, let's look at some news. The first item is about **Donald Trump's** plan to significantly lower tariffs on Latin American countries to curb rising food prices. Personally, I believe Trump is a relatively pragmatic individual who will address problems he identifies. From a fundamental stock market perspective, this could mean he will actively tackle economic challenges. However, even if we know Trump's policies might provide a "floor" for the stock market, this floor isn't necessarily the floor for our individual accounts. If you hold high-beta assets, your account might drop 30% or even 40% during a market correction, far exceeding the index's 10% drop, at which point you might be unable to withstand it and choose to liquidate. Therefore, risk control is crucial; even with a policy "floor," you need to ensure you can hold on and wait for it to take effect.

I have repeatedly reminded everyone on X recently not to blindly "buy the dip," especially during this earnings season. Many small and mid-cap stocks, even with excellent earnings reports, might see their prices fall due to "sell the news" phenomena, even breaking below previous relative lows. This is often because emotional premiums have already priced in two to three years of future earnings. If the current downturn makes you uncomfortable, I suggest locking in your profitable positions and securing some gains. Don't try to predict tomorrow's ups and downs, because the gains from the past period might have already exceeded your expectations and don't match your acceptable level of return. If the gains don't match, then the current downturn will also be hard for you to accept. An annual return of 7%-8% for the stock market is normal, not the recent 40%+ surge in the Nasdaq. We earn market returns, not **Alpha** (Alpha: excess return, referring to the return of an investment portfolio that outperforms the market benchmark while taking on equivalent risk) from our superior stock-picking ability.

Next, let's focus on the dynamics of the **Federal Reserve** (Federal Reserve: the central banking system of the United States). Today, Federal Reserve member **Neel Kashkari** delivered a speech, which the market generally interpreted as "hawkish," leading to a market downturn. Kashkari stated that he did not support the last rate cut but was "open to supporting or not supporting" a rate cut in December. This aligns with what **Jerome Powell** said last time when adjusting market expectations, indicating significant internal divisions. Essentially, the Fed members' speeches merely reiterate the disagreements from the last meeting and offer no new information.

Whether there's a rate cut or not, I believe its importance is not very high. Kashkari also mentioned that the policies for December and January (or November) might be interchangeable. Even if there's no rate cut this month, the Fed could still send "dovish" signals, indicating a potential cut next month; conversely, even if there's a cut this month, they could send "hawkish" signals, raising the bar for another cut in January. Therefore, whether a rate cut happens in December is, in my opinion, not the critical factor.

More importantly, if the labor market experiences issues, does the Fed have the room to provide support? Currently, the economy as a whole is not problematic, but the labor market, as part of the economy, warrants attention. For example, **Verizon** announced it might lay off up to 20,000 employees in the future, representing 20% of its workforce. This indicates that the labor market is indeed slowing down, whether due to the impact of **AI** or for efficiency gains (like **Amazon**).

The ultimate outcome for the labor market will be reflected in unemployment rates and non-farm payroll data. If, as **Bloomberg's** high-frequency data showed in July and August, the labor market rebounds, then the Fed might not cut rates, suggesting no issues with the labor market or economic consumption. However, if the labor market truly has problems, and the Fed denies it while sending "hawkish" signals, the market could experience volatility. As long as the Fed has the room and willingness to support the market and economy, its impact on the market won't be significant.

The biggest risk would be if the Fed suddenly signals a rate hike during a market rebound, which would completely change the narrative. But currently, I see no signals indicating a Fed rate hike. In this scenario, it's either a rate cut, a delayed cut, or no cut if the labor market is fine, and a cut if it's problematic. The Fed is currently in an "automatic transmission" mode; as long as it continues to accommodate the market, its impact on the market will not be very large.

Despite discussing many macroeconomic market factors earlier, my focus today is on **Disney's** earnings report. I'm very eager to share this report because it's an excellent example of how, even with lackluster stock performance, a company's fundamentals are moving in an increasingly positive direction. For such stocks, we should exercise patience and actively build positions.

First, let's look at the earnings results: revenue volume was 1.2% below market expectations, but **EPS** (Earnings Per Share) growth was 3.62% higher than anticipated. Overall, this report was mixed. The revenue miss primarily came from the Entertainment segment, which isn't a major concern for me, as Disney has historically been strong in this area, and occasional revenue misses are normal.

For me personally, the most scrutinized aspect of Disney's earnings report is its **DTC** (Direct-to-Consumer: direct-to-consumer business, typically referring to streaming services) streaming business, as this will determine how the market views Disney in the future. There are two core focus points: first, subscriber numbers, but more importantly, the **Margin** (profit margin)—that is, whether profitability and revenue growth have improved.

Regarding subscribers, as I mentioned last time, it was highly likely to exceed market expectations, and the actual result was indeed 1.25% higher than anticipated. In absolute terms, the market expected 2.38 million subscribers, but the actual figure reached 4 million, exceeding expectations by over 1 million, which is 68% higher than the market's forecast. This indicates subscriber growth far surpassed expectations. Furthermore, **APPU** (Average Revenue Per User: average revenue per user) also performed well, with market expectations at $7.89 and actual results reaching $8.04, also exceeding expectations. The dual growth in subscribers and APPU is a very positive sign for the streaming business.

If there's one key takeaway from the earnings report, it's undoubtedly the profit margin of the DTC streaming business. We see that over the past four quarters and for the next two quarters, the margins were 4.8%, 5.5% (for the quarter ending the last fiscal year), and 5.6% (for the current earnings report quarter). Growth was relatively slow over the past three quarters, but the next quarter is projected to reach 8.2%, and the quarter after that 8.1%. Company management's guidance for fiscal year 2026 (the new fiscal year about to begin) is to increase the profit margin to over 10% while maintaining revenue growth above 10%.

Consider this: if we set aside all other Disney businesses and focus solely on the DTC segment, if **Top Line** (revenue growth) can achieve over 10% growth, and **Bottom Line** (net profit growth) **Margin** can increase from 5.6% to over 10%, then its **Operating Profit** (operating profit) growth will be extremely rapid. With the latest quarter's operating profit at $352 million, its growth next year could potentially reach 100% or even higher. Therefore, the improvement in DTC business profit margin is what I consider the most impressive and noteworthy aspect of Disney's earnings report.

Once the market sees Disney's margin truly reach 10%, I believe that one day, the market will benchmark Disney against **Netflix**. Netflix's gross margin is over 30%, and I believe Disney has the potential to reach that level in the future. Although the **Disney+** streaming business has only been around for six years since 2019, it cannot be compared to Netflix's long history, but Netflix is undoubtedly the only benchmark in the industry, which means Disney still has significant upside potential.

Based on management's execution over the past two years, I believe it has been satisfactory; while not perfect, the company's business is gradually improving. As CEO **Bob Iger** stated in the earnings summary, Disney's average annual EPS growth over the past three years reached 19%. Achieving 19% EPS growth for three consecutive years is very difficult for traditional value stocks, putting it closer to growth stock levels. Growth stocks typically double their earnings in five years, and a 19% growth rate means earnings after five years will be well over double.

Regarding cash flow, if we exclude the impact of taxes and other factors, Disney's cash flow growth in fiscal year 2025 increased by 28% year-over-year. This allowed the company to both **pay dividends** (Dividend Payout: distribution of profits by a company to its shareholders) and conduct **share buybacks** (Share Buyback: a company repurchasing its own shares from the market). Due to improved internal cash flow, the total volume of share buybacks next year will double, from $3.5 billion this year to $7 billion, and the dividend payout will also increase by 50% compared to the previous year. These figures clearly indicate a significant improvement in the company's internal **Free Cash Flow** (Free Cash Flow: cash a company has left over after paying all operating expenses and capital expenditures that can be freely distributed).

Regarding the DTC streaming business, management stated their goal is to maintain or even exceed double-digit revenue growth. In terms of profitability, their previous guidance was also "double-digit," meaning over 10%. Considering that the first quarter of the next fiscal year is projected to have a profit margin of 8.2%, and the second quarter 8.1%, if the full year can reach the 10% target, then the quarterly profit margin is very likely to exceed 8%. Management also added that looking beyond 2026, they expect margin growth not to be a slight increase of dozens of basis points (0.5%-0.6%), but rather "in chunks," a significant increase of several percentage points. This means that if the margin stabilizes at 5.6% this year and rises to 10% next year, then in 2027 and beyond, it could potentially reach 12%, 13%, or even 15% or higher, gradually approaching Netflix's gross margin of 30%. Once the market opens up this imaginative space, Disney's streaming business's profit volume might even surpass its traditional businesses.

Regarding future imaginative space, I conducted some research. Currently, if you use the Disney APP, you can already create content using **Generative AI** (Generative AI: artificial intelligence capable of generating text, images, or other media content). During the earnings call, a questioner asked about future use cases for Generative AI on Disney's platform. Management responded that it was an excellent question and revealed they had already been in discussions with some AI companies. I specifically searched and found that the company they might be collaborating with is "Table." Management added that they are looking for opportunities to use AI technology to enhance the stickiness between the platform and its customers.

By watching videos from "Table," I broadly understood its application direction. If you visit Disney theme parks, you'll find that experience and interaction are core, especially with **NPCs** (Non-Player Character: non-player characters, referring to non-human characters in games or virtual worlds). The future application of Generative AI could be simple; for example, a child could converse with a cartoon character on screen, and the character would respond in its unique voice. The conversation content would be limited to ensure it's suitable for children. This allows Disney's cartoon characters to interact virtually with children, enhancing the experience. In the future, combining VR or projection technology could make this experience even more immersive. This is just current imaginative space; specific monetization models are not yet clear, but the key lies in how Generative AI can empower Disney's **IP** (Intellectual Property: intellectual property), which is an important direction for the company to consider in the future and a highly potential business.

Finally, there's Disney's valuation. The market expects Disney's EPS growth for fiscal year 2026 to be 10%, and management also provided "double-digit" guidance in the earnings call, which is precisely the lower end of 10%. Therefore, it's highly probable that management will achieve better performance than market expectations for fiscal year 2026. Currently, Disney's **P/E** (Price/Earnings Ratio: price-to-earnings ratio) is about 18 times. If, based on market expectations, EPS growth for the next three years is 10%, 11%, and 9% respectively, then its P/E will drop to 13.74 times after three years. From my personal perspective, Disney's current valuation is undervalued.

Interestingly, I have been following Disney for many years, holding it since the pandemic, with a total unrealized gain of about 25%-27%. However, during the same period, the S&P 500 index rose by over 50%, far outperforming Disney, with a difference of about 30 percentage points. But what I focus on is not whether it can outperform the S&P; I believe it will outperform the S&P and even many individual stocks in the future. It's just that the market currently hasn't recognized or agreed with its value, thus giving it a relatively low valuation. From the perspective of fundamental investing and value investing, if I believe a company's fundamentals, especially its management, are moving in the direction I expect, I am willing to give it time. I believe that one day, the market will recognize the true value of this company.

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As a reminder, the registration link for the offline events in two West Coast cities (Los Angeles and Silicon Valley) next week can also be found in the pinned comment.

That concludes this episode. See you next time.