Disney's (NYSE:DIS) Tomorrowland initially looked like a solid summer blockbuster, but the sci-fi epic could now be one of the House of Mouse's worst film flops ever. The film, starring George Clooney and directed by Mission Impossible: Ghost Protocol director Brad Bird, had an estimated combined production and marketing budget of $330 million.
However, after lackluster reviews and mediocre domestic and overseas box office returns, Tomorrowland is now expected to gross less than $200 million worldwide, which would result in an estimated loss between $120 million to $140 million.
Investors might think that loss would sink Disney's stock, which soared 33% over the past 12 months, but it didn't dip at all. Why aren't investors more worried?
The financial perils of modern moviemaking
If Tomorrowland eventually loses $140 million, it would set a new low for Disney's box office losses. Disney took a $136 million loss on the animated feature Mars Needs Moms, which cost $175 million to produce and market. John Carter had a combined production and marketing budget of $307 million, but it failed to break even with a global box office gross of $284 million. The Lone Ranger, which had an estimated production and marketing budget of $375 million, caused an estimated loss of $114 million.
All four films share a common problem -- they were all nine-figure bets on untested IPs. Tomorrowland is just a section of Disney's Magic Kingdom, Mars Needs Moms was based on a kids' storybook, while John Carter and Lone Ranger were dusty old characters relatively unknown to younger audiences.
Spending over $100 million to make those films was much riskier than allocating a comparable amount for guaranteed blockbusters like Marvel, Pixar, or Star Wars films. That's probably why Disney recently pulled the plug on Tron 3.
Meanwhile, cheaper films, especially ones with strong female fan bases, are making surprising gains against pricey summer spectacles.
Comcast (NASDAQ:CMCSA)/Universal's Pitch Perfect 2, which cost just $29 million to produce, has grossed a whopping $260 million worldwide since mid-May. Last year, Fox's (NASDAQ:FOX) The Fault in Our Stars grossed $307 million worldwide on a budget of $12 million. Those numbers strongly suggest Disney could benefit from making smaller films for younger female audiences.
Why aren't Disney investors worried?
Many Disney investors, including myself, were disappointed that Tomorrowland flopped. However, $140 million is just pocket change for Disney, which is expected to generate nearly $53 billion in revenues this year. Last year, revenue at Disney's Studio Entertainment business rose 22% annually to $7.3 billion as operating income more than doubled.
Disney's studio business simply has too many positive catalysts to ignore. Its Marvel Cinematic Universe has been meticulously planned out until 2019, a new Star Wars trilogy kicks off this December, and two new Pixar films will be released by the end of the year. Disney is also making live-action remakes of classic animated films like Pinocchio, Beauty and the Beast, Dumbo, and Winnie the Pooh. Its live-action version of Cinderella grossed $533 million worldwide on a production budget of $95 million.
Beyond films, there are plenty of other reasons to hold Disney stock. Attendance at Disney Parks and Resorts is rising so rapidly the company can repeatedly raise ticket prices without impacting attendance. Disney's new Shanghai Disney Resort, which is scheduled to open next year, could considerably boost its global attendance numbers.
In the first six months of 2015, Disney's consumer products revenue also rose 40% thanks to licensed Marvel and Frozen merchandise. Revenue at the Interactive division rose 46% thanks to the success of its Infinity interactive toys.
The sun will come out tomorrow
Disney still has a few theme park-related films in its pipeline, including ones based on the Matterhorn and It's A Small World, but hopefully it will allocate smaller budgets for those films to avoid a Tomorrowland-like disaster. But looking ahead, Disney investors shouldn't fret about Tomorrowland's lousy box office numbers. Marvel, Star Wars, Pixar, and other film franchises should easily offset those losses soon.