Disney's Troubles Deepen Amid Stock Slide As Lawsuit Alleges Hidden Streaming Losses During Chapek Era

Walt Disney Co.'s DIS shares are languishing near multi-year lows amid a host of fundmental issues. To make matters worse, the company is now reportedly sued by irate investors for allegedly misleading investors about numbers related to its streaming business.

What Happened: Disney shareholders have filed a lawsuit, alleging the Mouse House hid the losses incurred by its Disney+ streaming business as it went all out to hit lofty subscriber targets, Hollywood Reporter reported. The complaint was reportedly filed in the California federal court on Aug. 23.

Disney previously guided its streaming business turning to black by 2024. In the lawsuit, investors detailed a scheme to “inappropriately shift costs” by debuting content created for Disney+ on legacy platforms such as the Disney channel, the report said. This helped the company to move marketing and production costs, it added.

The then-CEO Bob Chapek, had said in December 2020 that Disney+ subscribers, at 86.8 million, exceeded the company's forecasts by a wide margin and reaffirmed that the business will be profitable by the end of 2024, the report said, citing the lawsuit.

But things went downhill from there and in the fourth quarter of 2022, the company's direct-to-consumer business, including Disney+, ESPN+, Hulu, and Hotstar, reported a wider operating loss of $1.47 billion, the report noted. The stock fell over 13% in reaction, it added.

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Why It's Important: Disney is facing multiple risks, including a drop off in attendance at its theme parks amid the fluid economic situation. The company's streaming business challenges only go on to multiply its problems.

Former CEO Bob Iger was brought back to replace Chapek in Nov. 2022 to turn the company around. In July, the company's board unanimously voted to extend his contract for two years until Dec. 31, 2026. 

Following this, KeyBanc Capital Markets analyst Brandon Nispel said the decision to give Iger additional time may have to do with providing more time to fully realize the significant restructuring and cost-savings initiatives throughout the business segments.

The analyst also said the incumbent may need more time to reset content creative direction and put processes in place for the transition of ESPN from linear to streaming.

Disney also has an ongoing legal tussle with Florida Governor Ron DeSantis over its opposition to the state's “don't say gay” law.

In premarket trading, Disney shares were up 0.08% at $84.47, according to Benzinga Pro data. The stock, however, is down about 3% this year vs. S&P 500’s 17% advance.

Related Link: Disney’s Stock Woes: Iger’s Revival Strategies Face Investor Scrutiny Amid Decade-Low Shares