The Walt Disney Company (DIS 0.16%) is one of the most popular businesses in the world. Because it relies heavily on bringing large groups of people together in person, it was devastated at the pandemic's onset. The company is recovering but nowhere near full strength. The persistence of COVID-19, rising inflation, and macroeconomic headwinds threaten to derail that rebound.
Unsurprisingly, the House of Mouse would draw a mix of opinions about its worthiness as an investment. What follows is the bull and bear case for investing in Disney stock.
Bull case: Economic reopening is unleashing pent-up demand
Disney's revenue fell by 6.1% to $65.4 billion in its fiscal year 2020. But that understates the magnitude of the damage the pandemic caused to the business. Sales from its more lucrative theme parks, cruise ships, and hotels were crippled. Those were replaced by revenue from its unprofitable streaming segments, which thrived during the pandemic. Disney's operating income fell to $3.8 billion in 2020 from $11.8 billion in 2019. That decrease more accurately reflects the extent of the downturn.
Fortunately, the advent of several effective vaccines has allowed the world to make progress against COVID-19. Folks who have been vaccinated are feeling more comfortable leaving their homes to visit theme parks, movie theaters, and hotels. As a result, the segment that includes Disney's theme parks more than doubled its revenue in the quarter ended on April 2 from the same time the year before.
Guests are so enthusiastic about returning to the theme parks that they pay more for admission, hotels, and food. Indeed, Disney noted that guest spending in its most recently completed quarter was 40% higher than in the comparable quarter in 2019.
The rebound in the theme parks segment will supplement the continued growth in its streaming services. Across its three offerings (Disney+, Hulu, ESPN+), Disney has 205 million subscribers. Management has repeatedly stated its confidence that the flagship service Disney+ can reach between 230 million and 260 million subs by 2024.
The company owns franchises like Marvel and Star Wars, capable of producing hits that attract viewers worldwide. It is reasonable to expect the company can hit the forecast.
Bear case: Inflation is pinching consumer budgets
The pandemic has triggered a chain reaction that has snarled supply chains. That's been coupled with robust consumer demand, raising prices on everything from groceries to gas. To make matters worse, the Russian invasion of Ukraine has crimped supplies further still. With folks paying more for everyday essentials, their budgets could have less room for discretionary items.
Unfortunately, the bulk of Disney's business is nonessential; travel, entertainment, and merchandise are not the most crucial items. If inflation persists, there is a looming risk that it could significantly hamper demand for Disney's products and services. This is not evident yet, as pent-up demand is outweighing all else. But after folks get that spending out of their system, they could pull back on trips to Disney theme parks.
DIS total long term debt (annual). Data by YCharts.
Disney is counting on a continued consumer spending spree to make up for the lost time during the initial stages of the pandemic. The company added a great deal of long-term debt to protect itself during the outbreak, so reduced consumer spending could make it more difficult to service that debt.
The bull case wins
Overall, the bull case carries more weight. The threat of an inflation-induced recession reducing consumer demand in the short term is genuine. But the key there is "short term." Disney has survived many economic cycles in its storied history. Its unique assets and strong customer value proposition mean that it's likely to continue delivering memorable experiences for generations to come.
