Please ensure Javascript is enabled for purposes of website accessibility

Here’s Why You Should Buy Disney Stock if it Delays Reopening Parks

By Parkev Tatevosian – Jun 25, 2020 at 10:46AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The dip in price would be a buying opportunity for long term investors.

After closing all of its parks to slow the spread of the coronavirus, Disney (DIS -2.60%) is now beginning to reopen. Its Shanghai park allowed guests to start visiting again in May, with limited capacity, and tickets sold out in a matter of minutes. Further, it announced it is reopening Disney World in Florida July 11 and Disneyland in California July 17.

However, Florida is reporting an increase in COVID-19 cases, and there is a chance that Disney may decide to postpone opening the gates at Disney World. Additionally, labor unions in Los Angeles are reporting that workers are feeling anxious about returning to work at Disneyland amid a growing number of cases in Los Angeles and Orange County.

If there is an announcement to delay reopening a park, that will likely send the stock price lower. Let's take a look at why that would be a buying opportunity for long term investors looking to buy shares in Disney. 

Fireworks in the night sky at Disneyland.

Image Source: Getty images.

Parks will not be firing on all cylinders for some time

Disney parks are a great asset; in 2019 the segment that includes parks generated 45% of total operating income for the company. However, this segment's short-term outlook remains highly uncertain. Given the increase of infections around the Orlando and Los Angeles areas, it's likely that the market is pricing in some probability of a delay in reopening.

If that does happen, it will not have nearly as negative an impact on revenue as the initial closing did. That's because parks are going to be run at a constrained capacity level for some time to allow for social distancing. For example, in Shanghai, the park is only allowing 30% of total capacity. The loss in revenue from delaying a park that is expecting to reopen at 30% will be from 30% to 0%.  Much less than the shock an initial closing, when capacity went from 100% to 0%.

Disney has demonstrated pricing power, and it can flex this power in the aftermath of COVID. In 2018, the price of a ticket to Disney World was $119. That same ticket in 2006 was $67. Still, with limited capacity available, and the pent-up demand, it can likely continue to raise prices without losing too many customers.

Streaming is the key to Disney's growth in the long term 

As of its most recent update, Disney+ has 54.5 million subscribers, and Hulu has 32 million subscribers. What's more, it is still in the middle of the international expansion of the services. Disney+ launched in Japan in June and is expanding to the Nordics, Portugal, Belgium, and Latin America this year.

Meanwhile, Hulu is not yet available anywhere outside of the U.S. In the first-quarter quarter conference call, the CEO at the time Bob Iger, in response to an analyst question, said, "So we don't have specifics except we do plan to begin rolling Hulu out. I'd say probably in 2021 internationally that is after the Disney+ launch."

The average Hulu subscriber pays $12.06 monthly, which is much higher than the average Disney+ subscriber, who pays $5.63. In contrast, the average Netflix subscriber pays $10.87. To give you a glimpse of the market potential, Netflix has 182 million subscribers worldwide.

Further, the services allow it to collect vast amounts of data on the viewing habits of people. Disney can then use this data to optimize its offerings throughout all of its segments -- a benefit that's not available to Netflix. 

A family watching a program on Disney+

Disney+ reaches 54.5 million subscribers. Image Source: Getty images.

What this means for investors 

An increase in the share of revenue coming from its streaming services may cause its stock price to trade at higher price-to-earnings multiples. Using a blended approach, the percent of revenue coming from services can be assigned a higher multiple. In contrast, the percentage that comes from its legacy business can continue to trade at its historical average multiple. 

An investor buying the stock when it dips on an announcement of delayed reopening will benefit from the gradual return to normalcy and an increased proportion of revenue coming from services over time. 

 

Parkev Tatevosian owns shares of Walt Disney. The Motley Fool owns shares of and recommends Netflix and 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

The Walt Disney Company Stock Quote
The Walt Disney Company
DIS
$99.50 (-2.60%) $-2.66
Netflix, Inc. Stock Quote
Netflix, Inc.
NFLX
$226.41 (-4.49%) $-10.64

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.