Not much is going right for Walt Disney (DIS -0.04%) these days.
The company seemed to come up on the losing end in its deal with Charter Communications earlier this month. Streaming subscriber additions have stalled, and it continues to lose money in the direct-to-consumer segment, while its linear TV cash cow is running into problems too. It also seems to be soliciting bids for ABC and other "noncore" media assets and said it would consider a partner for ESPN.
As a result, Disney stock is now trading at nine-year lows.
However, the company gave investors what seemed to be good news on Tuesday, sharing plans to double its investment in its parks, experiences, and products division over the next decade. While its media and entertainment segment is struggling, the parks and experiences business has been a beacon of strength for the company, continuing to deliver solid revenue growth and high profit margins.
Wall Street, however, didn't take the news well, sending the stock down 3.6% on Tuesday.
Is that sell-off warranted? Let's take a look at the plan for Disney going forward.
A wild ride
Disney said it plans to "accelerate and expand investment" in the parks division, nearly doubling capital expenditures to $60 billion over the next decade. The company announced the news at an investor summit on Tuesday.
CEO Bob Iger is aware of the need to spend this money wisely, saying, "We're incredibly mindful of the financial underpinning of the company, the need to continue to grow in terms of bottom line, the need to invest wisely so that we're increasing the returns on invested capital, and the need to maintain a balance sheet, for a variety of reasons."
Disney's flywheel business model is a key competitive advantage for the company, and management expects to lean into that as it expands, adding new Frozen-themed lands at several of its parks and a Zootopia-themed area at Shanghai Disney. It also promised to bring characters and franchises to life that have previously been overlooked.
Parks, experiences, and products chairman Josh D'Amaro said, "We have a wealth of untapped stories to bring to life across our business. Frozen, one of the most successful and popular animated franchises of all time, could have a presence at the Disneyland Resort. Wakanda has yet to be brought to life. The world of Coco is just waiting to be explored. There's a lot of storytelling opportunity."
In addition to expanding its parks, the company also plans to expand its cruise business, nearly doubling the worldwide capacity of its cruise line, adding two new ships in fiscal 2025 and another in fiscal 2026, up from the five it has today.
Finally, the company touted the huge opportunity it still has in parks, saying there's an addressable market of more than 700 million people that Disney has yet to reach.
Why it's a smart move
While the media business is in flux, the parks business has been a ballast for the company, serving as a steady source of growth (with the exception of the pandemic). Operating income has grown at a compound annual rate of 8% over the last six years, reaching $9.2 billion over the last four quarters, and segment-level operating margin is 28%, above pre-pandemic levels. Management said it saw strong results from the last cycle of investment, tripling capex over the last decade and seeing operating income quadruple.
Looking at the full picture and Iger's past moves, it makes sense he'd want to offload ABC in order to free up cash to invest in growth areas like parks.
Iger's biggest deal yet was the 2018 acquisition of Fox's entertainment assets, which he believed was necessary to give Disney the content to push into streaming. But that deal gives Disney a bevy of assets to leverage in its theme parks too.
Iger also recognizes that the future of Disney and the source of its competitive strengths are in its branded intellectual property, which it can leverage through multiple channels. When he returned as CEO in Nov. 2022, he promised to put storytelling back at the center of the business, and expanding the parks does just that.
An asset like ABC, on the other hand, doesn't contribute to Disney's branded IPO ecosystem, so it makes sense that business would be on the auction block.
Wall Street's reaction to the parks expansion is puzzling, and it may signal that investors have gotten too bearish on Disney, though the market often sells off stocks on news of increased investment, a shortsighted move.
While I'm waiting to see evidence the media business is turning around before I'd call Disney stock a buy, the expansion of its parks business is almost certain to be money well spent.
