Over the past three months, Disney (NYSE:DIS) stock has rewarded shareholders well. I believe that shares of Disney, the leading entertainment and broadcasting company, belong in a diversified long-term portfolio, as the company has an extremely strong global entertainment brand and exciting growth prospects in streaming media. Year to date, DIS stock is up 29%.
However, it may now be time for investors to take some of the impressive paper profits in Disney shares. In the next several weeks, I expect DIS stock to be volatile and Disney stock price to decline, possibly until the company’s next earnings report in early August. Here are the most important things that investors should know about DIS and Disney stock.
DIS Stock Has Diversified Revenue Streams
There are several catalysts that may help Disney stock price reach new highs in the coming quarters. One of them is its diversified and robust revenue streams, spanning across multiple geographies. The conglomerate also enjoys tremendous brand recognition globally.
Four segments generate Disney’s revenue:
- Media Networks (such as ABC and ESPN; 41% of revenue)
- Parks & Resorts (such as Disneyland and cruise lines; 34% of revenue)
- Studio Entertainment (including Lucasfilm, and Marvel; 17% of revenue)
- Consumer Products & Interactive Media (including Disney Store, and ESPN+; 8% of revenue)
On May 8, the company reported earnings for its second fiscal quarter. It logged revenues of $14.9 billion on earnings per share of $1.61 and beat analysts’ estimates on both the top and bottom line.
Results from its operating segments varied. CEO Bob Iger highlighted higher affiliate revenues from ESPN, as well as the popularity of its domestic theme parks. DIS also said that it would be repositioning itself towards direct-to-consumer services.
Now shareholders would like to see another strong quarter when Disney reports earnings, expected on Aug. 6.
2019 Has Been an Exciting Year for Disney Movies and Theme Parks
For all four segments, there have been many positive developments this year.
Memorial Day weekend saw moviegoers fill up theaters nationwide to watch the live-action remake of Aladdin, as the movie grossed $112.7 million at the box office — a Memorial Day record.
Following the $2 billion Avenger success story, the positive reception of Aladdin by the public is rather important because it could set the stage for Disney to further update its other iconic movies for the younger generations and their parents.
Management has recently pointed out that, despite the trade tensions, many movies are seeing huge interest in China.
Meanwhile, Disney’s theme parks are also enjoying increasing attendance rates and higher guest spending, leading to double-digit revenue growth. And devoted Harry Potter fans have not hesitated to wait up to ten hours in line to ride the new roller coaster. Therefore, analysts are expecting another stellar year for the parks.
Disney+ May Become a Game Changer
The company’s new streaming service, Disney+, will launch on Nov. 12 and will include original movies and TV shows from Disney’s brands, including ABC, A&E, Disney Channel, Disney Studio, Fox Assets, Lifetime, Marvel, National Geographic, Pixar, Star Wars and The History Channel.
In the U.S., the service, which is likely to appeal to a wide range of viewers, will cost $6.99 a month or $69.99 a year. And the global launch of Disney+ will start in early 2020.
Analysts expect Netflix (NASDAQ:NFLX) to be adversely affected by the launch, as DIS is removing its movies from Netflix. At present, Netflix needs to constantly produce original content or license content from other providers. Hence, Netflix has sizeable content costs.
Netflix’s most popular plan, the Standard tier, costs $12.99 a month, or twice the expected price of Disney+. It will be interesting to see how this price differential will affect the choice of subscribers.
Could there possibly be a price war around the corner that could benefit the U.S. consumer? And could Disney+ potentially cost Netflix an important portion of its user base?
In March 2019, Disney also finalized the acquisition of some of Twenty-First Century Fox’s — or, as it is now called, Fox Corporation’s (NASDAQ:FOX, NASDAQ:FOXA) — assets. The deal has given Disney access to Fox’s popular film production businesses, including 20th Century Fox, Fox Searchlight Pictures, and Fox 2000, as well as Fox’s television businesses.
Bob Iger, who has been credited with building up Disney’s intellectual property (IP) space, is upbeat about the positive effects of Fox’s popular franchises and branded content on Disney’s ecosystem. After this acquisition, Disney controls Hulu, another streaming-media company. Hulu is expected to have mostly adult content as opposed to Disney+, which will focus on kids and will not even feature any R-rated movies.
In other words, as of 2020, DIS will be able to stream the combined content library of Disney and Fox over three platforms: Disney+, ESPN+ and Hulu. And their combined momentum may very well push Disney stock to new highs.
Will DIS Stock Hold Up Well During an Economic Downturn?
InvestorPlace columnist Josh Enomoto has analyzed how a prolonged trade war between the U.S. and China could adversely affect Disney stock price. I’d like to highlight that Wall Street has also voiced concern that the U.S., as well as the global economy, could be headed for an economic downturn.
DIS is a cyclical stock . Prices of cyclical stocks tend to follow the business cycle. And, during prolonged economic downturns, cyclical stocks suffer. Let’s briefly remember how the economic downturn of a decade ago affected DIS stock.
In July 2009, Disney’s quarterly profits fell 26% as the company said it was “hurt by soft advertising sales at ABC and ESPN and dropping consumer spending at Disney World. The company also continued to suffer from a creative slump at its film studio.”
During downturns, many businesses cut their ad budgets. Because Disney depends on advertising dollars, during an economic contraction, maintaining positive revenue, strong margins, and earnings growth might become difficult for DIS. Over time, share prices and earnings expectations tend to move in tandem.
Hollywood is already nervous about how an upcoming recession may affect its results. Given that DIS is a conglomerate that makes and distributes movies, will Disney and Disney stock be immune to an economic decline? An economic downturn may adversely affect Disney’s sales, particularly in Consumer Products as well as Parks & Resorts segments.
Where Is DIS Stock Now?
In 2019, Disney stock has caught the attention of investors. On Apr. 11, prior to Disney’s investor day presentation, the share price closed at $116.60. The next morning, DIS stock gapped up to open at $127.91. Then, on April 29, DIS stock reached what was then an all-time high of $142.37.
In early May, Disney stock gave back back some of its April gains, mirroring the stock market’s volatility. On May 31, the stock saw $130.78. June has once again been good to shareholders, as the stock reached an all-time high of $142.95.
So what is next for Disney stock, especially given that we have a fundamentally strong stock that might be making a double top in the technical charts?
As a result of the recent impressive run-up of DIS stock, short-term technical indicators have become overextended. Investors who pay attention to short-term oscillators should note that Disney stock has become “overbought.”
Therefore, between now and Disney’s next earnings report in early August, there is likely to be some profit taking in Disney shares.
In such a case, DIS stock price could fall to the $130 area. If there is any further volatility and decline in the broader markets or the industry, then Disney could fall even further, toward $115, where Disney stock has major support. Then DIS may trade sideways between $115 and $125.
It’s almost impossible to time a top and a bottom in the markets. However, it may be timely to take some of the paper profits in Disney stock. Alternatively, you may want to hedge your long stock position with a covered call that expires on July 19. That expiration date would give you enough time to evaluate your position prior to Disney’s upcoming earnings.
Finally, if you are not yet a Disney shareholder, you may use any dip in the stock price to buy into the shares.
Bottom Line on Disney Stock
Within the past decade, the entertainment marketplace has been changing, as we have witnessed the impressive growth of streaming and mobile video. Disney has been adding to its entertainment empire, and I regard DIS stock as one of the key media and entertainment names to buy for value and future growth.
However, the rest of June and July may bring further volatility to the stock market and I am expecting Disney stock to be hurt by further short-term profit taking.
Long-term investors may want to use any potential price declines, especially around the $115- $125 level, as opportunities to buy DIS stock. Those who buy Disney stock will also benefit from its dividend, which provides a yield of 1.25%. In three to four years, patient shareholders are likely to be rewarded handsomely by DIS stock.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.