Source: PaxForex Premium Analytics Portal, Fundamental Insight
Walt Disney stock suffered during the onset of the pandemic. The House of Mickey relies heavily on the association of groups of people, so it is not surprising that the business would suffer during a worldwide outburst of an infectious illness.
In the more than two years since the pandemic was announced, the world has made significant progress in combating it, and many countries are discovering ways to get back to some level of normality, even if they are still protected from new outbreaks. Governments are lifting restrictions on business, and many are cautiously returning to the pleasures of pre-pandemic life.
The normalization trend is working in Disney's favor, and investors are once again showing curiosity about the company (and its stock). For these curious investors, here are a few reasons to consider buying Disney stock and one reason to hesitate.
First and foremost, Disney's streaming services are growing.
There are growing signs that consumers are increasingly choosing to watch content through streaming channels rather than other, more traditional ways (such as on cable TV or in movie theaters). Who can blame them? Streaming is often cheaper, can be watched in more places, and is easy to set up. This favorable factor should help grow Disney's already strong streaming operations.
As of the beginning of this year, Disney had 196.4 million subscribers to its three main streaming services (Disney+, Hulu, ESPN+), including 130 million subscribers to its flagship Disney+ service. The latter wasn't launched until November 2019, so the growth to 130 million in less than three years is amazing.
This segment of Disney's overall business is not yet profitable. In 2021, it had revenues of $16.3 billion and an operating loss of $1.7 billion. If it continues to grow at this rate, its profitability will only be a matter of time.
In addition, theme parks are flourishing again.
While the streaming business thrived during the pandemic, the theme park segment has been hit hard. Over the past two years, many theme parks have been forced to temporarily close at various times, causing major disruptions in revenue and operations. New safety protocols and vaccination have allowed the parks to reopen, and the segment is coming back to life. In the most recent quarter ended Jan. 1, Disney's segment, which includes theme parks, had $7.2 billion in revenues. That was more than double the $3.6 billion in the same quarter the previous year. Operating income also rose to $2.5 billion, up from a loss in the same period a year earlier.
Subdued consumer demand and operational improvements are contributing to guest spending. Disney CFO Christine McCarthy said guests are spending an average of 40 percent more than at the same time in 2019 before coronavirus. Meanwhile, attendance levels have yet to fully recover, suggesting that Disney theme parks have room to increase profits while the world beats COVID-19.
Well, third, Disney has a treasure trove of assets.
Walt Disney's success is due in large part to its many valuable brands and assets. Popular entertainment studios such as Lucasfilm, Marvel, Fox, Disney, and Pixar continue to produce popular hits that consumers can't get enough of. The brands and characters created fuel merchandise sales, become the source material for theme park attractions and accelerate the omnichannel flywheel.
These are incredibly durable assets that remain popular decades after they were created. Disney theme parks have several rides that have been around since the middle of the last century, yet consumers continue to pay hundreds of dollars to enter and stand in lines for hours to experience these rides.
Similarly, movies created by Disney studios could theoretically exist for centuries. Disney would pay to create content once, and it could continue to generate revenue and profits for decades. In a world filled with lots of forgotten content, Disney stands out with movies that keep viewers coming back.
Nevertheless, investors have one reason to hesitate.
No investment is risk-free. One reason to think twice before buying Disney stock is the indefinite future of the linear network segment (essentially traditional cable networks). Although the company recognizes the consumer shift to streaming, Disney is in no hurry to get out of the traditional viewing business. In the fiscal year 2021, which ended Oct. 2, Disney generated $28 billion in revenue and $8.4 billion in operating income from the linear networks segment. Operating income was down 11% from 2020.
The sheer size of the business and high profitability are reasons why management has been slow to sell. Ultimately, not all consumers will switch to streaming, and some will keep their cable connection. The question remains: how far will these losses go?
As long as the price is below 146.00, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 138.59
- Take Profit 1: 134.00
- Take Profit 2: 128.00
Alternative scenario:
If the level of 146.00 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 146.00
- Take Profit 1: 163.00
- Take Profit 2: 173.00
