Walt Disney (NYSE:DIS) has seen an amazing comeback. Despite taking a considerable revenue hit and reporting a significant loss in the last reported quarter, thanks to reduced capacity at the parks and closed movie theaters, this media stock has surged more than 65% from its March lows.

Although Disney has begun the process of returning to normal, it could take several quarters before revenue and earnings return to pre-pandemic levels. Given the conditions the company faces, Disney's stock could suffer while the company catches up with its performance.

The process of returning to normal

Disney began the process of reopening its parks this summer at limited capacity. Though limits have not officially changed at Walt Disney World, Florida Governor Ron DeSantis has expressed a desire to allow more guests into the park.

On the studio entertainment side, Disney is releasing the movie, Mulan, through video on demand to Disney+ customers. This comes after repeated attempts to open in theaters.

Family sitting on a sofa while watching a movie and eating popcorn.

Image source: Getty Images.

The negative effects continue

Still, even if Disney World sells more tickets, overall conditions will remain challenging. Disneyland Park in California remains closed other than a phased reopening of the Downtown Disney District. The continued suspension of Disney cruises also remains in effect through at least Oct. 31.

Additionally, Disney took a huge risk by releasing Mulan straight to Disney+, something that would probably not have happened in the pre-COVID-19 environment. At $29.99, it significantly exceeds the $19.99 cost of renting Bill and Ted Face the Music. And unlike Mulan, the Bill and Ted movie had a simultaneous theater release. Furthermore, fans know that in a few months, Disney will make Mulan available to Disney+ subscribers at no additional cost. Under such circumstances, customers may well choose to wait in order to watch Mulan.

Estimates of the production costs for Mulan come in at around $200 million. At a $29.99 rental cost, almost 6.7 million subscribers will have to rent the film at this price just for Disney to break even. Should the video-only strategy fail, it could cost both Disney and its shareholders significantly.

Disney financials

An year ago, both the studio entertainment and parks, experiences, and products divisions accounted for just over half of Disney's revenue. Now, thanks to hampered operations of both, these divisions account for just over 23% of revenue with overall revenue falling 42% from year-ago levels. This led to a loss of more than $4.72 billion, or $2.61 per diluted share in the third fiscal quarter.

That said, Disney's stock appears to ignore the pandemic. Year to date, the stock is now just 9% lower, and only 12% off its 52-week high. 

DIS Chart

DIS data by YCharts

Should investors buy?

Most observers, including myself, expect the media giant to make a eventual comeback once all COVID-19-related restrictions disappear. However, what's unknown is within what time-frame will this recovery happen. That said, Disney's stock seems to price in a relatively quick return.

When physical and social distancing restrictions ease, returning to pre-pandemic levels could take time. Attempts to return to normal operations are seeing delays. Even when theme parks, cruises, and movie theaters fully reopen, Disney will have to convince its fans that it will be safe to return. This could mean it may take more time than anticipated for revenue and earnings to bounce back. 

The company still holds over $23.2 billion in cash, which means it can absorb losses for a short time, including a financial failure with Mulan. That said, a commercial failure of Mulan could raise questions among investors regarding Disney's streaming-only strategy.

It's too early to comprehend whether the market has priced in these challenges into Disney's stock price, and that isn't a good sign for potential investors. It would rather make sense to wait for these uncertainties to be addressed.

Although Disney will probably come back, it will require patience. Prudent investors may want to wait for a correction in the stock price to find a buying opportunity, rather than purchase at relatively elevated levels.