After closing all of its parks to slow the spread of the coronavirus, Disney (NYSE:DIS) 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.
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.
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.