We all know a good business when we see one: Long lines, happy customers, high margins, and a powerful brand that gives a business an edge over the competition. In today's inflationary environment, the ability to raise prices and have customers shrug it off is rare. Walt Disney (DIS 0.18%) World has this quality in spades. But Disney is so much more than just Disney World.
Disney is a massive media conglomerate that consists of 12 Disney Parks, a studio entertainment business, merchandise, licensing, cable, direct-to-consumer streaming via Disney+ and ESPN+, ownership of the movie and TV portions of 21st Century Fox, a 67% stake in Hulu, and more.
Down 36% from its high, Disney looks like a stock worth buying on sale. Let's discuss why Disney's business is doing well right now despite its falling stock price, and address some concerns worth monitoring in the years to come.
Image source: Getty Images.
Disney World is thriving
Despite inflation, the ongoing COVID-19 pandemic, and a slew of other headwinds, Disney World is absolutely booming right now. You can see it, you can feel it, and you can verify it in the company's financial statements.
Sure enough, Disney reported incredible first-quarter fiscal 2022 results a month ago that indicated a recovery at its theme parks. But I had to see it for myself.
So, I went to Disney World for a vacation of my own. While I was there, I couldn't help but notice that even though it was off-season (between the holidays and spring break), Disney World was packed, and I mean packed, with families and folks of all age groups, many of whom probably haven't enjoyed a real vacation in two-plus years.
My friends and I woke up early every morning for "rope drop" (opening) and stayed basically till closing. We went to all four theme parks and park hopped around every day too. And I can tell you firsthand that nearly every vendor at every single park at basically every hour had a line. The rides were as popular as ever, with lines that resembled typical Christmas time, not a random week in March. By late morning, the most popular rides reached two-hour-plus wait times that didn't subside until close. And did I mention it rained every single day I was there?
The numbers back it up
On the surface, Disney World may seem like a very simple business. But once you begin to understand the emotional attachment that people young and old have to Disney -- the stories, the universes its characters live in, the rides, the merchandise, the memories, and the nostalgia -- you begin to understand why Disney has such incredible pricing power when it comes to its parks and its movies.
Disney's holiday quarter notched a five-year high operating margin and generated 95% as much revenue as its pre-pandemic holiday quarter in calendar year 2019 -- indicating that traffic is back at Disney World. Given what I saw, I wouldn't be surprised if Disney reported record high parks results for full-year fiscal 2022.
Disney reported 40% higher per capita spending at its domestic parks in Q1 fiscal 2022 compared to Q1 fiscal 2019, which shows that people are spending more money despite much higher prices. Disney World routinely raises prices at a much faster clip than the inflation rate. It has continued to raise ticket and food and drink prices.
The total cost of a trip to Disney World is a lot higher today than just a couple of years ago, once you factor in Genie+ and Lightning Lane, which are added fees for shorter lines on rides. Both services were introduced at Disney World in October 2021 and had a profound effect on Disney's impressive Q1 fiscal 2022 operating income.
The good and bad of Disney+
Disney+ added 11.8 million subscribers in Q1 fiscal 2022 to finish calendar year 2021 with 129.8 million subscribers. This news, paired with strong parks performance, is what led Disney stock to rocket as much as 7% higher after earnings. But over the last month or so, Disney stock has given up all of those gains and then some. What further accelerated Disney stock's downward spiral was an announcement on March 4 that Disney plans to release an ad-supported tier to its streaming service sometime later this year.
The general reaction has been negative because the move could mean Disney is bearish on its subscriber growth outlook amid concentrated competition in the streaming sector. Adding an ad-supported tier could threaten renewal rates of existing paid subscribers or encourage new subscribers to come in at a lower tier. There's also concern that Disney is mainly adding the ad-supported tier just so it can hit its long-term target of 230 million to 260 million Disney+ subscribers by fiscal 2024 -- even though the financial benefit per subscriber would go down.
Pricing power
Disney's FastPass system existed for roughly 20 years. Uprooting that process coming off of two of Disney's worst park performance years in recent history took guts. The success of Genie+ and Lightning Lane paired with higher ticket prices and food and beverage costs at Disney's parks shows that Disney's business has pricing power -- making it incredibly resistant to inflation.
The success of recent movies and shows on Disney+, such as The Book of Boba Fett, as well as anticipation for the release of a live-action version of Pinocchio starring Tom Hanks and the Obi-Wan Kenobi miniseries in May shows that Disney is producing the quality content that its audience craves. In short, Disney has once again proved the power of its brand and its ability to combat inflation by passing along higher costs to its customers.
A business that makes sense
In today's volatile stock market, it's more important than ever to understand what businesses you own and why you own them. Aside from it being one of the most powerful media companies in the world, what I like most about Disney is that it's a business that is easy to understand and will likely be around for decades, if not centuries, to come.
Kids who grew up with Disney tend to pass along that love to their kids. That's a pattern that can last for generations. And with the Disney universes like Marvel and Star Wars becoming larger and more immersive through shows, movies, and rides, Disney is able to create customer value on- and off-screen.
