Investors used to be excited when Walt Disney (DIS -0.48%) released a new movie. The period from 2012 to 2019 featured a flurry of blockbusters and was one of the most dominant runs in the history of entertainment.
Today, investors are crossing their fingers that a new movie doesn't flop. In its fiscal third-quarter 2023 presentation, for the period ended July 1, Disney outlined upcoming theatrical releases and new features on Disney+. Simply put, there aren't a lot of upcoming showstoppers like in years past, which could mean a prolonged period of disappointing box office numbers.
But Disney isn't your typical streaming company or production company. Rather, it is a media titan that derives value from a single film in ways that often transcend the box office and are difficult to measure. Here's a look at why it's a big mistake to judge the performance of a Disney movie solely on the box office numbers.
Image source: Getty Images.
Aging well over time
In the early days of the company, success at the box office meant survival, while a box office failure presented an existential threat. Disney poured everything it had, creatively and financially, into Snow White and the Seven Dwarfs. It crushed the box office and provided the funding needed to make future films. But Fantasia in 1940 and Bambi in 1942 flopped at the box office. Those failures, paired with the World War II-induced slowdown, meant Disney was in dire straits yet again.
Disney isn't in the same position as it once was. It can absorb box office mistakes by making money in other ways, such as theme parks, cruises, traditional media networks and cable, merchandise, and more. In fact, many Disney films that initially failed at the box office proved to be wildly successful over time.
Bambi is a beloved classic. And Fantasia grew to become one of the most iconic Disney films ever made -- inspiring a sequel Fantasia 2000, the highly popular Fantasmic! show at Walt Disney World, and Fantasia film showings with a live orchestra that are played by symphonies around the world. Granted, there are plenty of films that simply flop with little follow-up value. And even CEO Bob Iger admitted during the company's Q3 fiscal 2023 earnings call that Disney needs to do better at creating quality films that also succeed at the box office.
But a film like the live-action remake of The Little Mermaid provides cultural significance and fulfills Disney's promise to fans to be inclusive. Even though it disappointed at the box office, it could inspire a theme park ride down the road, compel folks that have never been to Disney World or Disneyland to go for the first time, or simply convince someone to sign up for Disney+.
The Princess and the Frog was released in 2009. Fifteen years later in 2024, it is inspiring the transformation of Splash Mountain to Tiana's Bayou Adventure. Disney has a way of extending the value of a film far beyond the box office in ways that are often hard to see in the short term.
An easier-to-measure benefit of a new film in a popular franchise is that it usually boosts engagement on Disney+. For example, Disney noted on its recent earnings call that the newer Avatar, Guardians of the Galaxy, and Indiana Jones movies all boosted viewings of older films in each franchise. Higher engagement boosts the platform's value to advertisers, which is incredibly important considering Disney is rolling out its ad-supported tier in several European countries and Canada on Nov. 1.
Big picture moves
Haunted Mansion joins The Little Mermaid and Elemental as Disney's third box office flop in a row. The movie hit theaters in late July a week after Barbie and Oppenheimer, which looks like a strategic blunder. Why directly compete with two of the hottest films of the year? Especially because the film would have probably done better if it was released closer to Halloween.
The timing of every film release has a purpose. And in this case, Disney may have been forfeiting some revenue at the box office in exchange for boosting interest in its highly popular Boo Bash, which is a Halloween celebration across domestic parks and on Disney cruises.
It's no secret that domestic parks were hit hard by a summer heat wave. But the holidays are the most popular time for the parks. Cooler weather and festivities help.
It's hard to quantify, but if attendance is up at Disneyland and Walt Disney World around Halloween relative to other years, it wouldn't be unreasonable to assume some of that could be due to Haunted Mansion. Haunted Mansion is an important film for Disney because it features one of its most popular and historic rides. The Haunted Mansion opened at Disneyland in 1969. There's a lot of fanfare and nostalgia with the ride, which continues to be incredibly popular.
A weak content slate
Just as judging a Disney film solely on its box office performance and ignoring the likely trickle-down value that is going to the parks would be a big mistake, it's also a big mistake to downplay Disney's current creative slump. 2019 was the best year at the box office in Disney's history.
Disney got a pass in 2020 and 2021 due to the COVID-19 pandemic. 2022 was all right. But nearly through the summer of 2023, it's clear that Disney is a long way away from getting back to its pre-pandemic success at the box office (although it's putting up all-time record results in revenue and operating income from the parks).
Worst of all, the company's upcoming theatrical, Disney+, and Hulu releases aren't too exciting.
Image source: The Walt Disney Company Q3 fiscal 2023 earnings presentation.
Image source: The Walt Disney Company Q3 fiscal 2023 earnings presentation.
In years past, Disney could bank on a Star Wars sequel or Marvel movie. But its recent Marvel movies have done just OK for the most part. Even Black Panther: Wakanda Forever didn't blow expectations out of the water. With a massive budget, it's going to take a lot for The Marvels to be a hit this fall.
Disney stock demands patience
Disney is a company that rarely has everything working at once. During the pandemic, the parks were shut down or open with limited capacity, movie theaters were closed, but Disney+ subscribers and engagement soared and helped propel Disney stock to an all-time high.
Today, the domestic parks are doing OK, international parks are thriving, Disney's cruise business is crushing it, Disney+ is still losing money but losses are narrowing, and the movie business is doing poorly.
However, Disney stock is within $5 a share of an eight-year low. And the overall company is still making a lot of money, with analyst projections for fiscal 2024 earnings per share clocking in at an average of $4.50. At its current price of around $89 a share, that would give Disney a 19.8 price-to-earnings ratio, which is impressive considering Disney+ isn't expected to be profitable till the end of fiscal 2024. If Disney+ starts contributing to the company's bottom line instead of hurting it, expect Disney's valuation to look even more attractive.
Disney has a track record of working out its creative kinks. Three to five years from now, it's easy to see a scenario where Disney+ is a growth driver and the parks are thriving. Even if the box office doesn't return to its 2019 records soon, there are a lot of other ways Disney stock can be an excellent long-term investment, especially at its depressed price level.
