Let's go back in time to 2019 -- which was the last boom period for Walt Disney (DIS 0.70%). In that year, Disney booked the most box office revenue in its history, racking up a record-high $69.6 billion in total revenue along with $11.1 billion in net income. It was probably the closest Disney has ever come to firing on all cylinders.
But even that year had its challenges and concerns, namely the restructuring required to launch Disney+ in November 2019. When a company is the size of Disney, it's almost impossible to have everything go right all the time.
Here's a reality check on Disney stock, how the business is performing now, and why investors should spend less time expecting perfection and focus instead on how Disney is positioning itself for long-term growth.
Image source: The Walt Disney Company.
What Disney needs to succeed
Disney generates most of its revenue from movies, linear networks (like cable), TV shows, content licensing, home entertainment sales, Disney+, its parks, and merchandise. Revenue from Disney+ is a drop in the bucket compared to what Disney makes from movies and its parks.
A perfect year for Disney involves folks going on trips, getting out of the house, and paying for experiences. And given that Disney generates revenue from around the world -- such as foreign box offices and its international parks -- Disney depends on low geopolitical tensions and the strength of other economies, namely China, Japan, Hong Kong, India, and Europe.
Disney also depends on high discretionary spending. So naturally, Disney benefits from low interest rates, low unemployment, a booming economy, and high consumer spending on services and experiences rather than goods.
In fiscal 2019, the global economy conjured up close to the perfect recipe for Disney to shine. Asia and Europe were doing well. The U.S. economy was roaring. Interest rates were low. And the consumer was ready to spend.
Where Disney stands today
Fast-forward to fiscal 2022, and Disney's domestic parks have rebounded nicely -- reporting the highest second-quarter revenue and operating income in company history. However, Shanghai Disneyland and Hong Kong Disneyland were closed for a sizable portion of the first half of fiscal 2022. Hong Kong Disneyland reopened on April 21, but Shanghai Disneyland remains closed despite COVID-19 restrictions easing throughout China.
So far this year, Disney has enjoyed early success at the box office from Doctor Strange in the Multiverse of Madness -- which is already one of the best performers in Marvel franchise history. And Obi-Wan Kenobi set a record for the most-streamed show on a premier weekend in Disney+ history.
However, rising interest rates and inflation are weakening the American consumer. If the economy falters, discretionary spending would likely come down as consumers prioritize paying for gas and other necessities over expensive vacations. That could mean yet another slowdown at Disney's parks.
As far as the movies, however, Disney has a stacked deck for the remainder of fiscal 2022 and headed into fiscal 2023. If the economy worsens, we could see consumers put off a Disney cruise or a trip to a resort. But they could still show up in droves to see upcoming expected hits like Lightyear, Thor: Love and Thunder, Black Panther: Wakanda Forever, and Avatar: The Way of Water.
A balanced outlook for what's to come
Despite the headwinds, Disney is much better positioned now than it was in 2020 or 2021. But it's nowhere close to its fiscal 2019 or fiscal 2018 performance.
The good news is that Disney has proven time and time again that its fanbase is loyal and growing and that it can continue to find new ways to expand its sphere of influence and drive sales. In fiscal 2020 and 2021, investors gave a slowdown in parks and movies a pass because Disney+ was growing so quickly.
In fiscal 2022, Disney+ has fallen a bit out of favor due to its unprofitability and streaming sector woes. But Disney's parks are booming, and its movie business is gearing up to have a great year. In this vein, the last few years have provided an excellent stress test for Disney that separates it from other pure-play discretionary stocks. If one aspect of its business isn't doing well, it's not a dealbreaker.
Disney can't control the ebbs and flows of the broader economy. But it can control its investments and long-term strategy. Investments in Disney+ should be measured not by their short-term impact, but rather considered a gateway that consumers enter to interact with Disney, make memories, and form emotional attachments to characters that could one day lead to the trip of a lifetime.
Now that the shares are down 45% from their high, it looks like as good a time as any for long-term investors to take a closer look at Disney stock.
