Disney Stock: Bull vs. Bear

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Walt Disney (NYSE:DIS), one of the top names in the entertainment industry, shed 15% of its value in 2021. Fourth-quarter financial results that disappointed Wall Street certainly didn’t help. Still, analysts are optimistic about the stock right now, giving it a 12-month price target of $198, on average. That’s 31% higher than its current level.

Are you considering making an investment in Disney stock right now? If so, taking a look at the bull and bear arguments will help you make a more informed decision.

The bull case

The world is opening up again – at least in fits and starts – and that’s been good for Disney. Its latest quarter was the first since the pandemic began that all of its theme parks were open. As a result, its Parks, Experiences, and Products segment doubled revenue from the year-ago period to $5.5 billion and produced an operating profit of $640 million. It’s strikingly clear that consumers’ appetite to get out and spend money on experiences is back again. Disney’s theme parks also have pricing power, a key signal that a competitive advantage is present.

Another reason why you might want to invest in Disney is the success of its direct-to-consumer business. After launching in November 2019, the Disney+ streaming channel now counts 118 million subscribers, an incredible feat. It took Netflix 10 years to reach that same level. Looking ahead, management expects Disney+ to have 230 million to 260 million customers by the end of fiscal 2024, the same year it also expects the service to be profitable.

Finally, a discussion about Disney’s investment merits can’t ignore the company’s valuable intellectual property. Its ability to monetize its various characters and storylines, whether it’s at theme parks, on the streaming service, or with merchandise, shows that Disney’s brand strength is unmatched. CEO Bob Chapek has his eyes set on Disney’s own metaverse. The ability to connect the physical and digital worlds by utilizing new technology will help Disney drive deeper connections with its fans. And this, of course, can lead to greater revenue opportunities.

The bear case

On the other hand, there are some important downside risks investors need to think about before adding Disney stock to their portfolios. For starters, Disney+ growth seriously disappointed in the last quarter with just 2.1 million new subscribers added. This is a big reason why the stock tanked following the financial release. And because many Disney+ customers are on the cheaper Hotstar plans in India and Indonesia, average revenue per user continues declining with each passing quarter. Disney+ will keep burning cash for a few more years.

What’s more, the world is still far from putting the pandemic in the rearview mirror. The recent surge in cases is a stark reminder that there is still a lot of progress that needs to be made to return to normal. Unsurprisingly, this negatively affects theme parks and cruise ships, which were just starting to gain some momentum in the back half of 2021. The COVID-19 omicron variant is causing people to change their travel plans. And Hong Kong Disneyland will temporarily close as cases surge there. Disney has to constantly deal with the uncertainty of the pandemic.

Finally, Disney has not been a winning investment in recent years – underperforming the S&P 500 over the past one, three, five, and 10 years. From fiscal 2014 through fiscal 2019 (to exclude the pandemic’s effect), sales and net income increased just 42.6% and 47.4%, respectively. This kind of fundamental performance is not the recipe for an outperforming stock. Management will need to prove that Disney’s focus on the direct-to-consumer business will be fruitful over the long term.

Investors should now be armed with some greater knowledge they might need to better analyze Disney’s stock. In my opinion, the bear case is stronger than the bull case, and for that reason, I am not a shareholder today.

Why Walt Disney Stock Crashed Today

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What happened

With the S&P 500 down 0.3% as of 12:05 p.m. ET Friday, and the Dow Jones Industrial Average down 0.8%, it’s looking like this week is going to end on a low note. Part of that you can blame on Dow component stock Walt Disney (NYSE:DIS), which is taking a 3.7% tumble today.

And that, I fear, you can blame on Guggenheim.

So what

Who is Guggenheim, you ask? It’s a privately owned investment manager based in Chicago. And more pertinently today, it’s the stock shop that just downgraded Disney stock to neutral.

As StreetInsider.com reports, Guggenheim cut its rating on Disney stock this morning, and cut its price target on the shares by 20% to $165 apiece, citing a slower “pace of profit growth at the company’s direct-to-consumer (DTC) and parks businesses, which is now below consensus through fiscal 2024.”

Over-optimistic analysts could prove to be a headwind for Disney over the next few years, you see, if it takes the economy longer to recover from the pandemic than they hope. Citing “digital growth challenges, parks trend volatility and cost inflation,” Guggenheim is of the opinion that a recovery in Disney’s parks and recreation business will take longer than predicted. And as more analysts come around to that point of view, Guggenheim expects we’ll see earnings predictions lowered, depressing investor enthusiasm for owning Disney stock.

Now what

Now, it’s not all bad news.

Guggenheim notes that Disney’s continued investment in direct-to-consumer streaming of movies and TV shows is also underappreciated by analysts. With Disney devoting $8 billion in investment in DTC this year, Guggenheim expects this business to keep growing, with as many as 10 million new subscribers to Disney+ coming online in the first quarter of 2022. The analyst also expects Disney+ to “approach breakeven by fiscal 2023.”

Still, by and large, the analyst sees Disney as a whole earning sufficiently little that year to value the stock at 30 times next year’s earnings, a premium valuation that leaves only about 10% room for upside from the stock’s current $150 share price.

In Guggenheim’s opinion, that’s worth a neutral rating – no more.

Disney World Ends a Big Perk: That May Be Good for Disney Stock

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The company has steadily raised prices and taken away things from its theme park customers and they seem to keep coming.

Walt Disney (DIS) - Get Walt Disney Company Report learned a powerful lesson over the past few years when it comes to its U.S. theme parks. The company can keep making the proposition worse for customers by raising prices and taking away perks and people will still come;

Families want vacations at Disney World and when you’re already shelling out thousands of dollars for tickets and hotel accommodations, what’s a little more money.

That’s why you hardly heard a complaint when the company turned its FastPass+ – something that visitors to its Florida Parks got for free – into Genie, a paid system offering roughly the same thing. Certainly, some regular visitors and annual passholders were upset at the change, but people who visit once in a lifetime or even once every few years just saw it as something else they had to pay for.

The change will benefit Disney’s bottom line when but it also showed the company that it does not need to offer some of the perks it traditionally has. And, that’s likely why the company felt comfortable dropping its Magical Express shuttle service which brought people staying in on-property resorts from the airport to their hotel free of charge.

Image source: Shutterstock.

Disney Does Not Need to Spend the Money

Staying on property has never been cost-effective. There are resorts of all types throughout the Orlando area that charge less than Disney does for its properties, but staying off-site robs visitors of some of the Disney magic. You miss out on perks like Disney’s transportation system and, in some cases, getting early morning access to certain parks.

Mostly, though, Disney’s marketing team has made the idea of staying on-site part of the magic and people shelling out for a Disney World vacation want all the magic they can get.

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The Magical Express made staying on property feel even more magical as the Disney-branded bus picked you up at the airport without you needing to shell out any more money. Now, the service will still run, but it won’t be called the Magical Express, and people who take it will have to book trips through Mears, the bus company that operated the prior service for Disney.

Why Does This Matter for Disney Shareholders?

While changing FastPass to Genie created revenue for the company where there was none previously, this move removes an expense. It cost Disney money to shuttle customers from the airport to their hotels and now, the Mouse House won’t have to pay that money.

That’s important because while Disney has reopened all of its theme parks, that segment of its business took a major hit during the pandemic.

“The most significant impact on operating income was at the Disney Parks,

Experiences and Products segment due to revenue lost as a result of closures and/or reduced operating capacities,” the company explained in its fourth-quarter earnings release. Although results improved in the second half of fiscal 2021 compared to the second half of fiscal 2020 from reopening our parks and resorts, we continue to be impacted by reduced operating capacities."

Until the crowds fully return – and that may not happen, even in Florida until the second half of 2022 – it makes sense for Disney to cut expenses wherever its customers will bear it. In this case, it does not seem like ending the Magical Express will lead to any meaningful amount of (or maybe any) visitors opting to not take a Disney World vacation or choose to stay off property.

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Walt Disney (DIS) Stock Turns Positive on International Expansion Plans for Disney+

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Shares of Walt Disney (NYSE: DIS) are trading modestly in the green after the company announced it has created an International Content Group to facilitate international expansion of its DTC business.

Disney stock was trading over 1% in the red today before shares pared gains to turn positive on the announcement.

The new division will be headed by Rebecca Campbell, who will “focus on local and regional content production for Disney’s streaming services, as well as continue overseeing Disney’s international media teams worldwide, reporting directly to Mr. Chapek.”

“Disney’s direct-to-consumer efforts have progressed at a tremendous pace in just a few short years, and our organization has continued to grow and evolve in support of our ambitious global streaming strategy,” Mr. Chapek said.

The company is planning to more than double the number of countries where Disney+ is available in to over 160 by fiscal 2023.

Disney’s streaming business serves nearly 180 million subscribers across Disney+, ESPN+ and Hulu.

Disney stock price is down nearly 3% YTD.

By Senad Karaahmetovic | senad@streetinsider.com

Should Disney World Be More Expensive?

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No one ever leaves Disney World in Florida thinking it was an inexpensive experience. Walt Disney (NYSE:DIS) theme parks aren’t cheap. Over the years, Disney World’s admission, food, lodging, and merchandise prices have far outpaced inflation.

But there’s another side to that story.

A counterpoint to Disney’s perpetual pricing upticks was on display at Epcot this weekend. The International Festival of the Arts kicked off on Friday, but it wasn’t the unique international food stations, art displays, or even signature rides and attractions drawing the crowds when the park opened. Guests were lining up to buy a popcorn bucket made in the form of Figment, an iconic Epcot character that we’ll get to shortly.

Disney is charging $25 for the bucket, and that includes a $5 portion of rainbow-colored popcorn. The line on Friday snaked throughout the park, and at one point the wait time was quoted at more than seven hours. Some of the people in the queue snapped up as many of the buckets as possible, despite the stated limitation of two Figment containers per guest, and listed them for sale on marketplace sites. Of the more than 200 that had already successfully sold on eBay by Saturday, the average final selling price was well north of $100, with one going for as much as a shipped price of $292.75.

The narrative on social media among Disney World enthusiasts is largely the outrage over the resellers. They took up spots in the line for the sake of potentially making four to five times their initial investment. However, there’s also another side to that story: Why aren’t we talking about how Disney is leaving money on the table by charging so little for the Figment buckets in the first place? No one wants to discuss that, because it would mean conceding that the historically premium-priced resort sometimes undercharges its guests.

One little park of inspiration

Before we get into the reasons I’m about to be ridiculed on the Disney socials for defending the media giant’s pricing, let’s talk Figment. Unless you’ve been to Disney World’s Epcot, you probably have no idea who the yellow-eyed, pink and purple amalgamation of real and fictional animals is to inspire such a feeding frenzy. He arrived to Epcot in early 1983 as the star of Journey Into Imagination, a slow-moving ride inspiring guests’ creativity. The ride opened just a few months after the park itself made its debut in late 1982.

The ride has been through a few updates, but Figment’s still there. He’s appeared in a few brief cameo roles outside the park and even inspired a comic book series, but he’s mostly unknown outside of Epcot regulars. In fact, Monty Python’s Eric Idle got into a humorous but heated exchange with fans last year when he mistook Figment for another character. This is relevant because Idle stars in the ride with Figment. He explained that he has never been on the attraction, recording his part from a Los Angeles studio. In short, even the current Dr. Nigel Channing from the ride itself has no idea who Figment is.

The lack of recognition outside of Disney World enthusiasts has probably helped fuel his popularity. Figment has become a secret handshake of sorts among Disneyphiles, so of course launching a festival with a collectible plastic popcorn bucket bearing his likeness was going to be a major draw.

The line for the Figment buckets was substantially shorter by Saturday, but still more than an hour for most nostalgia-hungry collectors. Disney is smart. It’s apparently well-stocked this time, and eventually the resale prices on third-party marketplaces will slide to meet the supply. The problem is that merchandise flippers continue to be an issue for collectible Disney theme park releases. Making more buckets – and charging more for them – is one way to solve the problem, increasing its profits along the way.

Suggesting that Disney could charge $45 and more than double its profit – it has to cost less than $5 to make and transport these bad boys in bulk – is going to be unpopular. Disney is routinely blasted for raising prices on annual passes, special events, and premium theme park experiences. Inflation is only partly to blame for the spikes in food, beverage, and merchandise prices.

But even when Disney World gets criticized for raising prices, the outcome is typically that it could be charging even more.

The after-hours Halloween party that returned to the Magic Kingdom last summer after a two-year hiatus came with a bit of sticker shock. Starting prices were 63% higher. The internet was outraged. Still, every night sold out.

The return of annual passes in September came with scaled-back perks and higher prices. They sold so well that Disney World suspended the sale of the more popular options two months later.

Disney followed the lead of most of its rivals, introducing premium-priced access to expedited ride queues three months ago. It was a controversial move, but the “Lightning Lane” access to the best attractions – the ones that require one-time payments – has often been more popular than the pre-pandemic platform that was included at no additional cost.

Disney World isn’t cheap, and it will probably never be because it doesn’t have to be. It’s the premium play in entertainment stocks. It’s expensive, sure, but until parkgoers flinch, Disney has more pricing elasticity and flexibility than it may think.