With the delta variant of COVID-19 spreading around the world and prolonging the pain of the pandemic, it feels a little like Walt Disney (DIS 0.22%) is back in a sort of no man's land all over again. It's not just that renewed pandemic fears could put a damper on Mickey and friends' gradual theme park reopening and box office normalization. COVID-19 continues to alter consumer activity, and in-person experiences -- what was once Disney's marquee segment -- may not be the same again for a long time.

The business need not be perfect to make this stock a buy, though. In fact, Disney has severely underperformed the S&P 500 since the start of 2020 (thanks, in no small part, to the stock's 2% decline so far this year compared to a nearly 20% gain for the index). But the Magic Kingdom proved on its last earnings call there are still plenty of reasons to invest for the long haul -- delta variant or not.  

Two smiling people taking a selfie at a theme park.

Image source: Getty Images.

Mickey Mouse's (sort of) summer vacation

Disney's "parks, experiences, and products" segment (let's call it PEP from here on out) finally clawed its way back to an operating profit during the third quarter of fiscal 2021 (the three months ended July 3, 2021). It was hardly the start to the busy spring and summer vacation season the House of Mouse has grown accustomed to in the past. Parks here in the states and abroad are still up and running but operating with some capacity restrictions, and the recent viral flare-up isn't going to help loosen restrictions anytime soon.

Let's just assume, for the sake of everyone's safety and well-being, that's the new normal for Disneyland, Disney World, and the other international properties in the portfolio. It would take some getting used to for shareholders, but it wouldn't be the end of the world either. PEP generated $4.34 billion in sales in a period most would still consider highly disrupted from the pandemic, and it managed to churn out $356 million in operating profit. For comparison, PEP hauled in just $1.07 billion in sales but generated a $1.88 billion operating loss in the same period in 2020 (the period encompassing the initial economic lockdown in response to COVID-19).  

Nevertheless, changes are being made to make the most of the situation (like the somewhat controversial initiation of the premium park plan called Genie+). Add in the lucrative product sales business (like the licensing deal Disney has with toymaker Hasbro), and it's going to be a while before PEP returns as the biggest moneymaker, but it's not all bad either. Steady positive progress will continue to be made, and I expect the worst is now in the rearview mirror for the PEP segment.


PEP Q3 2021

PEP Q2 2021

PEP Q1 2021


$4.34 billion

$3.17 billion

$3.59 billion

Operating income

$356 million

($406 million)

($119 million)

Data source: Disney.


PEP First 3 Quarters 2021

PEP First 3 Quarters 2020

PEP First 3 Quarters 2019


$11.1 billion

$14.3 billion

$19.6 billion

Operating income

($169 million)

$1.40 billion

$5.38 billion

Data source: Disney.

Whatever movies are now, don't call them an "experiment"

As for Disney's current primary breadwinner ("linear networks" made up of cable and broadcast stations), it's doing just fine and continues to churn out stable revenue and is highly profitable (it generated $2.19 billion in operating income in Q3, an operating margin of over 31%). Movie distribution is still a mess, though, with many consumers still foregoing a trip to their local cinema even as options begin to return to the silver screen.

However, part of the blame for the persistent stay-at-home entertainment conundrum is being levied against Disney itself. The company has been using its newfound streaming TV prowess to "experiment" (CEO Bob Chapek's word choice) with film distribution, sending pandemic-era hits like Black Widow to a premium-streaming-access launch simultaneously with a theater debut. A couple of performers have taken issue, not just with the "experimentation" wording, but also the release strategy that would seem to leave some money on the table versus a theater-only release window followed by streaming service distribution.  

It will take some time for the industry to sort through what's what, but Disney and its 174 million subscriber-strong (14.7 million more than three months prior) digital distribution tool is clearly a differentiator right now, with many consumers opting to stay home and enjoy their home cinema setups more often. Disney will need to work out how it pays its acting talent, and budgeting will be more important than ever with no massive box office payout on the horizon. But I wouldn't bet against Disney+, ESPN+, and Hulu's chances to crack the code on the right theater-to-TV balance.

So back to the original question: Is Disney stock a buy in spite of delta variant concerns? To be sure, parts of Disney's business could be impacted for the rest of this year as the pandemic rages on, but the Mickey Mouse of today is far different from the one just a couple of years ago. This is suddenly a long-term growth company again, with new digital services (like Disney+) accessible to millions of households around the globe that otherwise wouldn't be regular Disney customers. The bottom line is a mess at the moment (trailing-12-month free cash flow is just $1.4 billion on revenue of $63.6 billion), but things are starting to look up again.  

I don't think Disney stock will massively underperform the broader stock market forever, especially not while adding millions of new TV streaming subscribers every quarter and its theme park business only just beginning to recover. I'm still a happy shareholder in spite of delta variant concerns, and I will continue adding to my position over time.