Walt Disney's (DIS 1.48%) stock got crushed at the pandemic onset. The House of Mouse relies heavily on bringing groups of people together in person, so it's no surprise that the business would suffer during a worldwide outbreak of a contagious disease.
In the two-plus years since the pandemic was declared, the world has made solid progress in battling it and many countries are finding ways to return to some level of normalcy, even if they are still guarded against further outbreaks. Governments are removing business restrictions, and many are cautiously returning to pre-pandemic enjoyments.
The trend toward normalcy is working in Disney's favor, and investors are once again curious about the company (and the stock). For those curious investors, here are three reasons to consider buying Disney and one reason to be hesitant.
Image source: Getty Images.
1. Disney streaming services are growing
There are more and more indications that consumers increasingly prefer to watch their content through streaming channels rather than other more traditional means (like cable or in theaters). Who can blame them? Streaming often costs less, can be observed in more places, and is easy to set up. The tailwind should work to grow Disney's already robust streaming operations.
As of Jan. 1, Disney boasted 196.4 million streaming subscribers across its three main streaming services (Disney+, Hulu, ESPN+), including 130 million from its flagship service Disney+. The latter only launched in November of 2019, so the growth to 130 million in less than three years is impressive.
This segment of Disney's overall business is not yet profitable. It delivered $16.3 billion in revenue in 2021 and generated an operating loss of $1.7 billion. If it keeps growing at this rate, it will only be a matter of time until it turns profitable.
2. Disney theme parks are thriving again
While the streaming business thrived during the pandemic, the theme parks segment was hit hard. Many theme parks were forced to close temporarily at various points over the past two years, severely disrupting revenue and operations. New safety protocols and vaccination efforts have made it possible for the parks to reopen and the segment is roaring back to life. In its most recent quarter ended Jan. 1, Disney's segment that includes theme parks reported revenue of $7.2 billion. That is more than double the $3.6 billion it reported in the same quarter the prior year. Similarly, operating income rose to $2.5 billion compared to a loss in the same time period the preceding year.
Pent-up demand from consumers and enhancements made to operations are fueling guest spending. Disney CFO Christine McCarthy said that guests are spending on average 40% more than they were at the same time in 2019 before the outbreak. Meanwhile, attendance levels have not fully recovered, highlighting there is room for Disney's theme parks to boost profits as the world beats back COVID-19.
NYSE: DIS
Key Data Points
3. Disney has a treasure trove of assets
Fueling much of Walt Disney's success is a large collection of valuable brands and assets. Popular entertainment studios like Lucasfilm, Marvel, Fox, Disney, and Pixar keep churning out popular hits consumers can't seem to get enough of. The brands and characters created fuel merchandise sales, become source material for attractions at theme parks, and accelerate the omnichannel flywheel.
These are incredibly long-lasting assets that remain popular decades after their creation. Disney's theme parks feature several rides that have been around since the middle of the last century, yet consumers continue to pay hundreds of dollars for entrance and wait in hours-long lines to experience the attractions.
Similarly, films created by Disney's studios can theoretically survive for centuries. Disney will pay to create the content once, and it can go on generating revenue and profits for decades. In a world filled with an abundance of forgettable content, Disney differentiates itself with movies that keep viewers coming back.
A reason to hesitate
No investment is without some risk. One reason to hesitate before buying Disney stock is the uncertain future of its linear networks segment (basically, its traditional cable networks). While the company acknowledges the consumer shift to streaming, Disney has been slow to divest from the traditional viewing business. In the fiscal year 2021, ended Oct. 2, Disney earned $28 billion in revenue and $8.4 billion in operating income from the linear networks segment. Operating income was down 11% from 2020.
The business's massive size and robust profitability are why management has been slow to divest. Ultimately, not every consumer will switch to streaming, and some will keep their cable connections. The question remains: How far will these losses go?
