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Disney Stock May Exhibit Further Volatility and Price Weakness

Editor’s Note: This article was updated on Sept. 26, 2019, to correct a stock price.

Over the past two months, Disney (NYSE:DIS) stock has traded in a range between about $130 and $140. In May the stock saw an all-time high of $147.15. Currently it is hovering around $132. Despite the recent decline in price, year-to-date, Disney shares are still up about 23%.

Source: ilikeyellow / Shutterstock.com

As we get ready to enter the busy earnings season and the final quarter of the year, investors are wondering whether Disney stock can continue to reward long-term shareholders. I believe it may now be time for investors to take some of the impressive paper profits in Disney shares.

In the next several weeks, DIS stock will likely be volatile and the price will likely decline further, possibly until the company’s next earnings report. Here are the most important things investors should know about Disney stock.

How DIS Stock Makes Money

Disney stock has diversified 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; 32% of revenue)
  • Parks & Resorts (such as Disneyland and cruise lines; 32% of revenue)
  • Studio Entertainment (including Lucasfilm, and Marvel; 18% of revenue)
  • Direct-to-Consumer & International (including Disney Store, and ESPN+; 18% of revenue)

On Aug. 6, the company reported earnings for its third fiscal quarter that fell short of analyst estimates. It logged revenue of $20.2 billion that was below the consensus estimate of $21.4 billion. Earnings per share of $1.35 was also below the $1.74 expected by Wall Street.

Our readers may remember that 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.

In the conference call, management partly blamed the continuing integration of the assets of Twenty-First Century Fox for the poor quarterly numbers.

Results from Disney’s operating segments also varied. Direct-to-Consumer and International unit, for example, had sizable operating losses, i.e., $553 million compared with $168 million YoY. Furthermore, attendance declined at domestic theme parks by 3% during the quarter.

After the disappointing results in August, shareholders would like to see a better quarter when Disney reports earnings, expected on Nov. 14.

Can Disney+ Become a Game Changer for Disney Stock?

The company’s new streaming service, Disney+, will launch on Nov. 12 and 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. 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 content from Netflix. At present, Netflix needs to constantly produce original content or license content from other providers. Hence, Netflix has sizable 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? If so, many of the providers including Disney could find their margins decrease.

CEO 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.

Yet despite the exciting developments at the streaming space for Disney, many analysts are wondering if there are already too many streaming platforms.

In other words, do consumers need this many services? And could there even be some sort of consolidation in the coming months?

Whistleblower’s Claims Against Disney

In the second half of August, breaking news hit the wires that Sandra Kuba, a former Walt Disney Company accountant, had filed several whistleblower tips with the Securities and Exchange Commission (SEC).

She is claiming that Disney has been systematically falsifying, or rather, inflating revenue for years. These allegations mostly involve the Parks & Resort segment.

The whistleblower reports claim that the inflated revenue would be in the billions of dollars over time and that flaws in Disney’s accounting software made the falsification difficult to trace.

Former Louisiana Attorney General Charles Foti has also recently started an investigation into these allegations.

Since the initial publication of these claims, Disney stock has exhibited price weakness. The SEC investigation is likely to take several months and the general public may not know the full results for some time. However, in case of a legal claim such as this, it is safe to assume that investors will first sell the stock and ask questions later.

Therefore, I would not expect Disney stock to make new highs until the issue is fully resolved.

Other Headwinds Against Disney Stock

Over the past several months, Wall Street has been endlessly debating whether our economy may soon face a 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 Direct-to-Consumer & International as well as Parks & Resorts segments.

Finally, if you are an investor who also pays attention to technical charts, Disney stock’s price action is urging caution. It’s almost impossible to time a top and a bottom in the markets. Although there is considerable support around the $130 area, it is likely that there might soon be another leg down, taking the shares toward $115.

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.

However, I am concerned about the recent accounting falsification claims made against the company. Therefore, until we have more clarity on this issue and see the next quarterly results, I would not be a buyer of Disney stock.

If you are already a Disney shareholder, it may be timely to take some of the paper profits in DIS stock. Alternatively, you may want to hedge your long stock position with a covered call or put spread that expires on Dec. 20. That expiration date would give you enough time to evaluate Disney’s upcoming earnings.

As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2019/09/disney-stock-may-exhibit-further-volatility-and-price-weakness/.

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