[Disclaimer: This article discusses possible causes and conditions that may have affected the Walt Disney Company’s stock price (DIS). The analysis and conclusions presented in this article are for entertainment purposes only. Nothing in this article should be construed as financial or investment advice. Please consult with a licensed financial professional prior to making any investment decisions. Once again, to be clear: The following article is not, and should not be viewed as, investment advice. Do not use information in this article to make investment decisions, always seek advice and counsel from professionals.]
The Walt Disney Company stock (NYSE: DIS) seems to be struggling with an identity crisis as of late. There is little question that the company weathered the covid-19 pandemic better than anyone expected 14 months ago. The company’s CEO Bob Chapek grabbed the reins of Disney just as its theme parks were starting to close around the world. Chapek not only steered the company out of harms way, he oversaw tremendous growth during a period that even the most optimistic expected permanent wounds and the more cautious feared a total collapse.
2021 started off strong for TWDC’s stock price, sitting around $178 a share on January 4th, a far cry from the low $80s the stock saw during the early days of the pandemic. Two full months into 2021, DIS was trading at an all-time high, breaking the illusive $200 a share mark. The stock price was soaring, but then things started to cool off rapidly.
As of publishing this piece (5/19/2021) DIS stock price sits at $168.11, the lowest it has been in all of 2021. It is strange that there appears to not be one single reason to point at to explain this drop. The theme parks are coming alive, with Disneyland reopening three weeks ago and Walt Disney World continuing to increase capacity. Disney’s European park, Disneyland Paris, has yet to reopen but has announced a June 17th reopening date.
Disney’s direct-to-consumer division is continuing to dominate, reporting over 103 million Disney+ subscribers as of April 1st, a total that most analysts wouldn’t have expected until 2024 when the service launched 18 months ago. With both Hulu and ESPN+ seeing huge gains.
The film lineup for the second half of 2021 is full of potential blockbusters, such as: Westside Story, Shang-Chi and the Legend of the Ten Rings, Eternals, and Disney Animation’s 60th film set for November, Encanto. Disney will be releasing three major films in theaters and on Disney+ Premier Access: Jungle Cruise, Black Widow, and Cruella. These three films are going to be huge and will rack up more box office revenue than the March 5th release of Raya and the Last Dragon. This prediction stems solely from the fact that theaters around the country are reopening at a rapid pace, allowing for a much larger potential audience compared to the barren theatrical landscape when Raya was released. These films provide Disney with three immediate potential benefits:
1. Increase Disney+ subscribers
2. Generate revenue from the one time $29.99 premier access cost, and
3. Generate revenue from the box office.
Disney will also be releasing Pixar’s Luca solely on Disney+ at no additional cost for subscribers. This film was expected to be released as a summer blockbuster, so Disney is hoping this will help generate new streaming subscribers.
Disney Cruise Line is preparing to sail once again starting later this year, with their newest ship the Disney Wish accepting reservations for summer of 2022.
Professional and college sports are getting back to a more normal schedule which benefits Disney’s media networks, namely ESPN. The non-traditional schedule of 2020 and the truncated seasons helped to sink ratings for sporting events. This hurt Disney’s ad revenues last year. A more normal schedule should increase ratings and boost ad sales.
So what is going on? Why has Disney’s stock seen a near 15% drop since March? When looking at a company as large and diverse as The Walt Disney Company, the answer is never simple and when outside market forces can bend and shape the stock price, the answer is rarely universally accepted.
It is important to remember that a company’s stock price is tied to analysts’ expectation of future performance of a company. This is why we often see company’s that are making positive headlines, like Zoom last year and Pfizer the last six months, have flat or even falling stock prices. This confuses people, they think “wait, everyone is using Zoom, shouldn’t their stock be taking off?” If investors think Zoom is peaking right now and has no long-term growth potential, then no, the stock will flatten and fall. Same with company’s that are making headlines for poor performance, often times you will see the stock price increase because there is something investors see in the company’s future that intrigues them.
This comes up a lot with Disney, people will get confused reading that Disney is laying off large numbers of cast members at their theme parks but then see their stock price soar. This paradox is understood when you think of the layoffs as a reflection of the current financial situation of the company and the stock price an indicator of investor’s confidence in the future of the company. There are a lot of other factors that help explain a company’s stock price, but this general idea that the movement of the stock reflects investors’ confidence in future performance is a good place to start.
Does this mean that investors are suddenly skeptical of Disney’s future? If you only look at the stock price, the answer would be ‘yes,’ but if you talk to investors and read analysts’ reports the answer is ‘no.’ This is what makes the last two months of Disney’s stock price a bit puzzling.
Last week Disney announced that Disney+ has 103 million subscribers, a total that experts couldn’t fathom 18 months ago, however, due to the streaming service’s rapid growth earlier in 2021, the number actually fell short of Wall Street estimates of 110 million. Citing this as the reason for the sub $170 stock price has been a favorite sophomoric take for Disney bloggers. It is the kind of analysis that comes from reading headlines only.
Claiming that last week’s second quarter report was full of bad news for Disney ignores a lot of positive signs, like the better-than-expected earnings per share, net income from continuing operations was up 95% on the year, and income from their media division was up 74% on the year. Contrary to the popular narrative, the earnings report was full of a lot of strong and promising news.
Based on a review of a number of Wall Street analyst reports there seems to be a some consensus building about what is going on. In summary the view is that Disney weathered the pandemic better than expected and the stock price reflected that from late summer into fall of last year. The unprecedented number of announcements that came in December along with better than expected subscriber totals continued to rocket the stock price through the winter. The wildly successful vaccines helped to boost the stock price even more, with investors excited about theme parks, cruise lines, and movie theaters reopening. This culminated in the $200+ stock price in early March.
Since March the news has been very good for Disney, which has kept the stock price strong, but the news hasn’t been as flashy or exciting as it was in the final months of 2020 and in early 2021. The improving pandemic forecast has already been baked into the stock price, so news about the parks continued reopening is good, but expected, so that alone won’t push the stock higher. So the price is sort of marinating a bit and falling back a little while investors catch their breath.
The thought is that Disney was soaring so high and so fast that this intermittent cool down was not only expected but it was necessary. This is common when a stock is soars rapidly for a period of time. A perfect example of this would be a gambler at a black jack table. They start the night with $100, using that to start playing. He wins a few hands and loses a few hands, but suddenly he starts winning a bunch. With the early losses the gambler now has $75, short of his starting total, down $25 but improving. Ten mins later he is up to $85. Five minutes later he is up to $100, he has broke even. But the table is hot and he wants to keep playing. In a few minutes he has $125, then up to $175, now he’s up to $200 and then $250. There comes a point when the gambler will likely pull $100 out of his chips and put it in his pocket. He earned back his initial investment and he wants to make sure that that is safe. The act of securing his initial investment lessens his total on the table from $250 down to $150. This does not mean he won’t be back to $250 or even $350 soon, but there is a moment of breath-catching that happens. Same thing can happen on Wall Street when a stock sees a rapid growth with further growth expected. At some point the stock can stall or even slide back a bit, with no clear cause tied to the company’s performance, as investors secure their initial investment, temporarily lowering the stocks value as a result. If this happens with enough people at the same time, you’ll see the stock price reflect this and it seems like this is part of what is happening right now with Disney.
One must also look at the macro economic factors at play. We are in uncharted waters right now as the economy comes back to life following the pandemic. A lot of stimulus money is flowing, which is sparking a lot of worries about inflation. Fears over rising interest rates is causing some concerns within the investment community as well. At the same time, retail sales are way up and consumer confidence is reaching new heights. We saw huge numbers of travelers taking to the sky this last month at the same time we received a lower than expected jobs report for April 2021. The culmination of these contradictory reports creates uncertainty and the investment community hates uncertainty. Even bad news is preferred, as long as it is foreseeable. Uncertainty, by its definition, makes the ability to predict the future difficult and the ability to predict and properly prepare for the future is what investing is all about. Often times periods of uncertainty are met with a ‘deer into headlights’ response from Wall Street, followed by safe and protective moves, such as cashing out initial investments in strong stocks to cover any unpredictable drops. Any analysis of a company’s stock that fails to consider both macro and micro economic factors is incomplete.
This doesn’t mean that analysts anticipate the stock will remain stagnant for the rest of the year. According to 19 well-respected analysts’ ratings, Disney has a 12-month consensus price target of $209.06. This means that many experts believe the stock will pick back up and sit around $210 by this time next year. Wells Fargo senior equity partner Steven Cahall sees a two-year path to $250 for the stock price. These forecasts are all-time highs for The Walt Disney Company and indicate a lot of confidence in the near 100 year-old company.
Disney has a lot of offerings lined up in the coming years. So it is easy to understand investor’s confidence. The theme parks will see new Marvel themed lands debuting in Disney California Adventure at the Disneyland Resort in Anaheim on June 4th, 2021, also in Walt Disney Studios Park at Disneyland Paris later this year, and in Hong Kong Disneyland in 2023. New attractions are coming to Disneyland (Mickey and Minnie’s Runaway Railway), Walt Disney World’s Magic Kingdom (Tron Lightcycle Power Run), and Epcot (Guardians of the Galaxy Cosmic Rewind and Remy’s Ratatouille Adventure). A new Star Wars themed hotel in Walt Disney World’s Disney’s Hollywood Studios and a new Marvel themed hotel in Disneyland Paris. A Zootopia land coming to Shanghai Disneyland and a land called ‘Fantasy Springs’ coming to Tokyo DisneySea, which will host three mini-lands themed to Peter Pan, Frozen, and Tangled. Disneyland Paris will also see a Frozen land coming soon to their park. There is also a public push with the city of Anaheim for a possible expansion of Disneyland over the next five to ten years.
Disney Cruise Line has two new ships expected to be revealed over the next five years, joining the rest of the ships, a big boost to one of Disney’s most profitable ventures.
Disney+ will have a goal of nearly 150 new programs every year, not including new projects on Hulu, ESPN+, Hotstar, and Star. The company has a vast international expansion planned for the rest of the year and into 2022 and beyond.
New films are expected from every studio under the Disney umbrella, including: LucasFilm (Star Wars, Indiana Jones), Marvel (Doctor Strange, Guardians of the Galaxy, Thor), Pixar, Disney Animation, 21st Century Studios, Searchlight Pictures and Walt Disney Studios. These studios will also be creating content for streaming which will include new series and specials.
While the company’s media networks (ABC, FX, Freeform, ESPN, Disney Channel, etc) are expected to continue to see declines due to cord cutting (consumers canceling cable subscriptions in favor of streaming services) Disney seems prepared for this change and they’re using their numerous streaming services to help transition their content with their customers.
Live theater will reopen later this summer and Disney’s successful slate of shows are set to start back up on Broadway and in touring companies around the world, including Frozen, Aladdin, Little Mermaid, and The Lion King.
As always, churning below the surface, Disney has a vast library of content they license to third parties (think Princess themed birthday decorations or gym bags adorned with vintage Mickey Mouse, basically all of the products that get sold by non-Disney retailers that use any image, likeness, name, music, or story owned by Disney, they pay Disney a licensing fee to use the images, likeness, etc. It is huge business) they have their own massive retail business selling home goods, clothing, and toys (think ShopDisney), they create and distribute music, not to mention their massive real estate holdings, and investments in companies you might not associate with Disney like the sports betting and fantasy sports operator, Draft Kings. Yep, Disney owns a large interest in Draft Kings.
There is no company like the Walt Disney Company. Their assets are diversified across a wide array of channels creating multiple streams of income. The company faced its highest and hardest hurdle with the covid-19 pandemic and not only managed to survive the worst global health crisis in a century, but it appears the company is stronger than it was before.
The dip on the company’s stock price appears to be an opportunity for investors to catch their breath after a wild ride over the past nine months. Industry experts do not expect the break will last long, assuming the pandemic continues to improve. The story of the last year of Disney’s stock price is not this dip (really a blip) that’s been seen over the last two months, rather, it will be the recent speed and veracity of the company’s growth, a company of certain size and age that usually lends itself to slow and modest growth. Disney is growing like a hot new stock, but with the reliability of a blue chip stock reaching the century mark.
No one knows where the company would be today if it were not for covid-19, but what we do know is that the Walt Disney Company is one of the most influential entertainment companies in the world with one of the most respected and identified brands among any generation in modern history. While the journey may be filled with stalls and slips, the general agreement seems to be that Disney has a lot of room to grow and has the plans and strategies to get there.