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Dow Jones Jumps Despite Dismal Jobs Report; Disney Stock Soars, and Apple Stock Can't Keep Up

By Timothy Green – Aug 5, 2020 at 1:39PM

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Investors were happy with Disney's results despite a steep revenue decline, and an analyst downgraded Apple on valuation.

Private payrolls rose by just 167,000 in July, according to ADP, far below the increase of 1 million that economists were expecting. The disappointing report does not bode well for the U.S. economy, which is still reeling from the pandemic.

The stock market entirely ignored the payrolls report on Wednesday, with the Dow Jones Industrial Average (^DJI -1.40%) up 1.15% at 12:55 p.m. EDT. That gain was partly driven by Disney (DIS -3.52%) stock, which soared after a quarterly report that was deemed good enough by investors. Meanwhile, shares of tech giant Apple (AAPL -0.80%) failed to participate in the rally following an analyst downgrade.

A man with a tablet and a paper with charts.

Image source: Getty Images.

Disney stock soars after tough earnings report

Disney reported its fiscal third-quarter results on Tuesday evening, and they weren't pretty. Revenue crashed 42% to $11.8 billion due to the pandemic, missing analyst expectations by nearly $600 million. The parks, experiences, and products segment suffered an 85% revenue decline, and the studio entertainment segment saw a 55% revenue decline.

Disney did manage to report a small adjusted profit of $0.08 per share, down 94% year over year but $0.75 ahead of analyst expectations. There was some other good news: The company's streaming business is booming. Total paid subscriptions have surpassed 100 million, with Disney+ alone having 57.5 million subscribers at the end of the quarter and Hulu and ESPN+ making up the balance.

With the movie business still in turmoil, Disney announced a bold move related to its delayed Mulan film. The company now plans to release the movie on Disney+ as a premium offering, charging consumers a $30 fee on top of the monthly subscription price. If the strategy works, it will help offset lower revenue from movie theaters.

With the pandemic still a big problem in many parts of the United States, including California and Florida, a full recovery for the parks business isn't happening anytime soon. However, the company's new premium streaming strategy might help it salvage its movie business even if consumers continue to shun theaters.

Disney stock was up 9.4% by early Wednesday afternoon. Shares are now down just 11% since the start of the year.

Apple stock downgraded

While Disney stock was surging on Wednesday, Apple stock was moving in the opposite direction. Analyst Wamsi Mohan of Bank of America downgraded the stock on Wednesday, pointing to a skewed risk/reward balance given the valuation. BofA now rates Apple as neutral, down from a previous rating of buy.

Mohan has a few problems with Apple stock: Valuation multiples have expanded rapidly despite analyst estimates for 2021 earnings largely staying the same; high selling prices for 5G iPhones could hurt sales; and services margins could decline due to content costs. Despite the pessimism, BofA raised its Apple price target from $420 to $470.

Apple has certainly become a pricey stock in the past few months. The price-to-earnings ratio has soared from the high teens during the depths of the pandemic sell-off in March to more than 33 today. This is a company valued at nearly $2 trillion, and its core business – the iPhone -- is unlikely to be a growth driver in the long run given smartphone market saturation. Mohan is right to be concerned about the valuation.

Apple stock was down about 0.5% by early afternoon, although shares are still up nearly 50% year to date.

Timothy Green owns shares of Bank of America. The Motley Fool owns shares of and recommends Apple and Walt Disney and recommends the following options: long January 2021 $60 calls on Walt Disney and short October 2020 $125 calls on Walt Disney. The Motley Fool has a disclosure policy.

Stocks Mentioned

Apple Stock Quote
Apple
AAPL
$146.63 (-0.80%) $-1.18
Walt Disney Stock Quote
Walt Disney
DIS
$95.93 (-3.52%) $-3.50
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$33,947.10 (-1.40%) $-482.78

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

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