Entertainment conglomerate Walt Disney (DIS 1.02%) receives a lot of attention these days for its thriving Disney+ streaming service, but it's important not to forget the cruise lines, theme parks, and other aspects that contribute to the bottom line. That diversification has helped the iconic company to be a winning stock in the long-term. However, it may leave shareholders wanting more this year. Investors should consider these three potential red flags heading into 2022.
1. Resorts and cruise lines are still struggling
Disney's fantastic intellectual property drives most investor attention to its streaming service Disney+, but other significant parts of the business are still struggling through the pandemic. Disney's parks and experiences segment houses its resorts and cruise lines -- tourism-driven businesses -- and the drop in travel from COVID-19 has significantly impacted revenue and profits.
Image source: Getty Images.
Let's look at the numbers. In 2019, parks and experiences generated $6.7 billion in operating income on revenue of $26.2 billion, so these can be very profitable businesses for Disney. But in 2021, the segment's revenue fell to $16.5 billion and operating income was just $471 million. Profitability fell off more sharply because Disney has to spend a lot of money to open its parks and maintain them, and if attendance is light, the revenue will not offset those costs.
These lost profits hurt Disney's overall bottom line -- total operating income fell from $14.8 billion in 2019 to $7.7 billion in 2021.
2. Disney+ isn't profitable yet
Disney is becoming a force in the entertainment streaming business. Roughly two years after launching Disney+, it has 179 million total subscribers across its platforms (including Disney+, ESPN+, and Hulu). Disney+ subscriptions grew a staggering 60% year over year in 2021. This large and growing subscriber base opens up more potential money-making opportunities down the road through advertising as well as price increases for its services.
However, growth doesn't always equal profitability. In fact, Disney+ is eating away at the company's profits. Revenue from direct-to-consumer services like Disney+ and Hulu grew 55% in 2021 to $16.3 billion. Yet, they stilll posted $1.6 billion in operating losses. While this was an improvement from 2020 when the segment lost $2.9 billion, it might be a while before these services contribute to the company's bottom line.
3. The balance sheet still hurts
In 2019, just before launching Disney+, Disney made a blockbuster acquisition, buying a variety of intellectual property from 21st Century Fox for a whopping $71 billion. The deal was massive, requiring shares to be issued to help fund it in addition to billions of debt.
DIS Total Long Term Debt (Quarterly) data by YCharts
The chart above shows the increase in debt that occurred. The timing was unfortunate with the pandemic coming in 2020. Disney's financial position is on solid footing; it has nearly $16 billion in cash on its balance sheet. But it could have paid down some of this debt if not for COVID's impact on operating income. Now, Disney remains saddled with this large debt load.
Is Disney headed for a down year?
Disney's momentum in streaming and likely eventual recovery of its parks and experiences segment means that the stock could still be an excellent long-term blue chip. However, in the near term, Disney has a sizable debt load on its balance sheet, it's burning money as it grows Disney+, and it still has significant shortcomings to its bottom line without its tourism-reliant businesses at full speed.
Meanwhile, the stock trades at more than $150, 50% higher than in early 2019, before it made the Fox deal and before the pandemic hurt its business. The long-term upside of its streaming components may buoy Disney, but investors should probably approach the stock with a long-term mindset as there don't seem to be many immediate, positive catalysts in 2022.
