Walt Disney (DIS 1.19%), one of the top names in the entertainment industry, shed 15% of its value in 2021. Fourth-quarter financial results that disappointed Wall Street certainly didn't help. Still, analysts are optimistic about the stock right now, giving it a 12-month price target of $198, on average. That's 31% higher than its current level.
Are you considering making an investment in Disney stock right now? If so, taking a look at the bull and bear arguments will help you make a more informed decision.
Image source: Getty Images.
The bull case
The world is opening up again -- at least in fits and starts -- and that's been good for Disney. Its latest quarter was the first since the pandemic began that all of its theme parks were open. As a result, its Parks, Experiences, and Products segment doubled revenue from the year-ago period to $5.5 billion and produced an operating profit of $640 million. It's strikingly clear that consumers' appetite to get out and spend money on experiences is back again. Disney's theme parks also have pricing power, a key signal that a competitive advantage is present.
Another reason why you might want to invest in Disney is the success of its direct-to-consumer business. After launching in November 2019, the Disney+ streaming channel now counts 118 million subscribers, an incredible feat. It took Netflix 10 years to reach that same level. Looking ahead, management expects Disney+ to have 230 million to 260 million customers by the end of fiscal 2024, the same year it also expects the service to be profitable.
Finally, a discussion about Disney's investment merits can't ignore the company's valuable intellectual property. Its ability to monetize its various characters and storylines, whether it's at theme parks, on the streaming service, or with merchandise, shows that Disney's brand strength is unmatched. CEO Bob Chapek has his eyes set on Disney's own metaverse. The ability to connect the physical and digital worlds by utilizing new technology will help Disney drive deeper connections with its fans. And this, of course, can lead to greater revenue opportunities.
The bear case
On the other hand, there are some important downside risks investors need to think about before adding Disney stock to their portfolios. For starters, Disney+ growth seriously disappointed in the last quarter with just 2.1 million new subscribers added. This is a big reason why the stock tanked following the financial release. And because many Disney+ customers are on the cheaper Hotstar plans in India and Indonesia, average revenue per user continues declining with each passing quarter. Disney+ will keep burning cash for a few more years.
What's more, the world is still far from putting the pandemic in the rearview mirror. The recent surge in cases is a stark reminder that there is still a lot of progress that needs to be made to return to normal. Unsurprisingly, this negatively affects theme parks and cruise ships, which were just starting to gain some momentum in the back half of 2021. The COVID-19 omicron variant is causing people to change their travel plans. And Hong Kong Disneyland will temporarily close as cases surge there. Disney has to constantly deal with the uncertainty of the pandemic.
Finally, Disney has not been a winning investment in recent years -- underperforming the S&P 500 over the past one, three, five, and 10 years. From fiscal 2014 through fiscal 2019 (to exclude the pandemic's effect), sales and net income increased just 42.6% and 47.4%, respectively. This kind of fundamental performance is not the recipe for an outperforming stock. Management will need to prove that Disney's focus on the direct-to-consumer business will be fruitful over the long term.
Investors should now be armed with some greater knowledge they might need to better analyze Disney's stock. In my opinion, the bear case is stronger than the bull case, and for that reason, I am not a shareholder today.
