Walt Disney (DIS -0.58%) has been struggling this year. Although its parks business has been strong, the streaming service Disney+ remains unprofitable, and the company's media assets aren't doing all that well, either.
The company looks as though it is attempting to focus on its core strength in its theme parks business. It recently announced plans for a sizable investment into that segment. But with so many other areas of concern, is this really a good move for the company?
Disney to spend $60 billion on parks and cruises
Over the next decade, Disney is planning to spend a whopping $60 billion to help expand its strongest business unit -- parks and experiences -- which has grown at a rate of 17% over the past nine months, totaling $24.8 billion for the period ended July 1. The investment will go into upgrading and expanding its theme parks and cruise lines. With over 1,000 acres of land that it has the potential to develop, there is no shortage of opportunities for the business to create new and exciting experiences for its customers.
You also don't have to look far to see the potential in cruises. Carnival Corp, one of the U.S.'s top cruise line operators, has reported 132% year-over-year revenue growth over the past two quarters. And that's even amid inflation. Consumer demand has been strong for Disney's ships too, with occupancy rates reported to be at 98%. Disney doesn't specifically break out cruise line revenue.
Why this new approach could be a problem
Allocating a lot of cash toward your best business generally isn't a bad idea. It's often good to focus on strengths and core competencies. But Disney's issue is that it still has a streaming business that's facing considerable challenges. It will need to spend money to compete against Netflix and other streaming services in order to develop strong content and to keep and grow its subscribers.
While Disney+ was offering promotions and was priced competitively at the start -- and gaining huge numbers of subscribers -- things were looking great. But that has effectively stopped. Disney+ prices are now higher and the streaming service has been losing subscribers, and it still remains unprofitable. The company's direct-to-consumer business reported a $2.2 billion loss over the past three quarters -- only slightly better than the $2.5 billion loss it incurred during the same period a year earlier.
Meanwhile, Disney's media and entertainment division, which is the company's largest, reported a profit of $2.2 billion over that same time frame -- but that was down 46% from the prior-year period. Disney may need plenty of cash to help grow these areas of its operations. The problem is that Disney hasn't been a business that typically generates huge amounts of free cash flow.
DIS Free Cash Flow (Quarterly) data by YCharts
At roughly $625 million per quarter, that translates into annual free cash flow of approximately $2.5 billion. If the company is going to spend an average of $6 billion per year on parks and cruises, which is about double the norm, that could end up more than wiping out its positive free cash flow. And this is without factoring in any investments into streaming or media.
Is Disney stock worth taking a chance on?
Walt Disney's stock hasn't been at these levels since 2014, and it may be tempting for investors to take a chance on the company. Disney, after all, has some excellent brands in its portfolio, which suggest this should be a business that can bounce back and recover from its current struggles.
But with so much going on right now -- including the potential sale of some of its media assets, a streaming service that is struggling, and the company seemingly at a crossroads -- the safest option is to hold off on buying the stock right now and take a wait-and-see approach.
