There is no company more vulnerable in the near term to the COVID-19 outbreak than Disney (NYSE:DIS). While the broader market has fallen more than 20% year to date, Disney's share price has already lost a third of its value this year.
The NCAA March Madness basketball tournament has cancelled all further games, and the NBA has suspended games for the current season. The Centers for Disease Control and Prevention (CDC) are advising people not to take unnecessary trips.
Disney is going to suffer in the short term. The combined revenue from the parks, experiences, and products and studios segments generated about half of its total revenue in fiscal 2019 (which ended in September). Operating profit from the parks segment alone made up 45% of Disney's total last year.
However, even if Disney were to shut down all of its parks and postpones movie releases, missing out on billions in revenue and profit in the process, Disney's long-term intrinsic value wouldn't be permanently impaired. Disney is one of my largest holdings, and last week I bought more shares.
Disney World isn't going away
It's important to remember that stocks are not valued based on how much profit a business will earn in a single year. What matters is how much profit that company is earning 20 years from now.
In an extreme, hypothetical scenario, Disney's earnings could be completely wiped out this year, but it makes no difference in the long run. The world will eventually get past this nasty virus, businesses will get their supply chains back in order, and those who wanted to go to Disney World for spring break will go next year.
At least some portions of the attractions in Shanghai, Hong Kong, Tokyo, Paris, Florida, and California have been temporarily closed, and Disney also delayed the release of Mulan in China. During the last conference call, management guided that the park closures in China would cut $145 million from operating income, which assumes the parks are closed for just two months. Clearly, if the virus lingers for several months, lower traffic is going to take a bite out of Disney's operating profit, which was $14.9 billion in fiscal 2019.
Disney+ is steadily adding subscribers, but at nearly 29 million as of early February, it's not a huge revenue contributor yet. Plus, it's losing money as Disney invests in content. Management doesn't expect Disney+ to earn a profit until fiscal 2024.
What would Warren Buffett do?
As Warren Buffett has said, "Predicting rain doesn't count, building the ark does." The more than 100-year history of the market has taught us that it goes up most of the time, but there are periods where it falls, and those downturns come when you least expect it.
Remember that you should never put money in the stock market that you'll need within five years for more important life stuff. Assuming you've gotten that taken care of, you shouldn't sell your stocks.
Here's another bit of wisdom from the greatest investor: "The best chance to deploy capital is when things are going down."
One of Buffett's all-time greatest investments was putting a quarter of Berkshire Hathaway's net assets in Coca-Cola stock in the aftermath of the 1987 Black Monday crash that sent the Dow Jones Industrial Average down 22.6% in a single day.
Disney and the global economy will survive the novel coronavirus. We've seen epidemics before that were much more life-threatening than COVID-19, and everything worked out in the end.
Fans will have to be content to stay home and watch old Star Wars flicks on Disney+ for the next few months. But when the virus finally fades away, Disney World will still be there.