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Disney: Buy or Sell?

By Jennifer Saibil – Jun 2, 2020 at 8:52AM

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With theme parks and movie premieres on hold, is Disney doomed as an investment option?

What once seemed like a sure bet has now become the target of fierce debate due to the unforeseen drama that's now playing out related to COVID-19. The current investment situation is as suspenseful as a Disney (DIS -2.31%)-produced movie, and it has some huge implications: Should you buy or sell Disney stock?

Let's try to break it down and see if this company still has some magic left.

What made Disney such a sure thing before?

Disney is the iconic American entertainment company with operations in a number of different industries. Its business generates revenue in four separate segments: parks, experiences, and products; media networks; studio entertainment; and direct-to-consumer and international.

Mickey Mouse and Minnie Mouse in front of the Magic Kingdom castle

Image source: Disney.

What do you think of when you think of Disney? If your first thought was Disney World, that's because theme parks have traditionally been the part of the company generating the largest share of overall revenue. The media networks segment includes the likes of Disney+, ABC TV, ESPN, and HULU, and has been the company's rock during the pandemic, overtaking first place in sales among the four segments as so many have been asked to stay home. The studio segment includes all of the film production companies under the Disney umbrella, which have largely put their operations on hold since efforts to limit COVID-19 began. 

Disney's diverse operations portfolio has made it a pretty powerful contender with multiple strong revenue streams. In the first quarter of 2020 which ended Dec. 28, 2019, right before COVID-19 began to take hold in the U.S., revenue increased 36%, and parks and media each contributed about a third of total sales. Media networks saw a 24% jump year over year as the Disney+ launch took place in the quarter, while the parks and experiences segment increased 8%.

All of the divisions together help drive Disney's fantastic ability to generate revenue growth, as we can see in the past five quarters.

Metric Q2 2020 Q1 2020 Q4 2019 Q3 2019 Q2 2019
Revenue growth 21% 36% 34% 33% 3%

Data source: Walt Disney quarterly reports

Where are the holes, and can they be mended?

With the closures created by the broader economic shutdown, sales at Disney's parks, experiences, and products segment decreased by 10% in the fiscal 2020 second quarter (which ended March 28). Disney's U.S. theme parks have been closed since mid-March, but the company recently said its two most popular Florida parks, the Magic Kingdom and Animal Kingdom, would reopen on July 11, with others to follow over the course of the week. That means Disney theme parks have been closed for almost all of its third quarter.  In the third quarter of 2019, Park and experiences made up 32% of total revenue, and with that segment bringing in a fraction of its typical sales, that could bring down total revenue significantly.

Disney's Asian theme parks were reopened earlier this month. Disney Springs, a themed shopping venue at Florida's Disney World, is already open as well. When the rest of the parks reopen, they will follow the Asian parks model and do so with limited capacity and many restrictions for the foreseeable future. Disney's multiple vacation resorts and four cruise ships will be closed for even longer. This means Disney will continue dealing with significant revenue losses on the segment for the foreseeable future.

With movie theaters also closed due to COVID-19, Disney had delayed the theatrical release of many of its films, including the much-anticipated Mulan and Black Widow releases. Also, production on nearly all new films has stopped, meaning the negative revenue effects will be felt in this segment for several more quarters at a minimum.

In a stroke of good luck, Disney+ was launched in November and has been supplying some revenue while the rest of Disney's businesses are mostly inoperable. It has also come through as a platform to debut films that were meant for theater release, including Artemis Fowl, scheduled to release straight to streaming on June 12, and Hamilton, which is scheduled for July 3.

Although customer response to Disney+ has exceeded the company's expectations (perhaps with the help of staying home through a pandemic), expenses from the launch are weighing down earnings. Operating expenses were $427 million higher in the second quarter driven by costs incurred due to Disney+, and the company expects further losses due to these investments before the business becomes profitable.While Disney is pursuing an ongoing launch strategy in global markets for Disney+, it's taking a break from rolling out Hulu in international markets because it doesn't want to tie up cash in investments for that kind of project.

In the media networks segment, revenue has been most negatively impacted by advertising sales and the cancellation of sporting events. However, ESPN's Michael Jordan documentary was its most-watched documentary ever, and it has several more projects along those same lines in the works.

An eye toward the far, far future

The argument to sell Disney stock can be tied to concerns about whether Disney can get back to its prior performance levels within the next year or two and to the uncertainty of what could happen with the company during this timeframe. Worries about how long it will take to generate greater sales and earnings, as well as the potential for the worst effects of COVID-19 to return with greater force at some point still in 2020, are real and worthy of consideration. Even if the economy stays open until a vaccine is ready, some portion of consumers are still likely to do little more than staying home and safe, and a significant portion of Disney's revenue will still be compromised.

Those who are bullish on Disney will counter that nothing in the company's essentials has changed. It's still full of the same talent and creativity and it will be able to get back up to speed quickly once the broader economy returns to some level of normalcy. With Disney's brand name, far-reaching revenue drivers, and comfortable cash position, the company is not likely to go bust. As the economy recovers, Disney will as well. In the meantime, it is turning to some more inventive strategies to succeed in the short term, such as bringing the film Hamilton straight to streaming early.

Fiscal 2020 Q2 revenue was still up 29% year over year despite the onset of these setbacks in that quarter, and the company's diverse operations have helped smooth out problems in specific areas. Focusing on the short term based on current events underestimates Disney's creativity, talent, and sheer brawn. 

Despite pessimistic analyst downgrades and Disney's share price being down 17.9% year to date, investors with a long-term view should consider seizing this opportunity to get shares at a better price.

Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Walt Disney and recommends the following options: long January 2021 $60 calls on Walt Disney and short July 2020 $115 calls on Walt Disney. The Motley Fool has a disclosure policy.

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