It’s been a very bad month for stocks. Even against the backdrop, the collapse of Walt Disney (NYSE:DIS) stock has been remarkable. Disney stock traded for $150 per share late last year. This past week, it fell to as low as $90 before bouncing on Friday. That sort of volatility might be normal in a highly speculative firm, but for a blue-chip like Disney, it’s breathtaking.
That said, it’s not hard to see why traders have been dumping Disney stock. The company is exposed to the coronavirus from China on nearly all sides.
Disney cruises, theme parks, ESPN, and so on, the company has major weaknesses all across the board. As a result, analysts have started downgrading the stock. Todd Juenger of Bernstein, for example, cut his price target from $141 to $119 while writing that:
“In the COVID-19 era, the most common and difficult question for media investors has been: at what price do DIS shares become interesting? Our answer is “we’re getting pretty close,” but believe there is still more bad news to get out of the way. We expect the domestic parks to shut down. Perhaps that will be the day to start buying DIS shares. The fulcrum issues are: to what extent is this “one-time”, will it trigger a recession, will it permanently alter behavior?”
I share Juenger’s concern. The virus is a massive problem for Disney going forward. Just look at its affect on various lines of business.
One of Disney’s biggest problems in recent years has been competitive pressures on its ESPN television channel. Cord-cutting has hit cable networks hard. ESPN has historically been one of the most profitable cable channels out there, and naturally, as revenues in that ecosystem start to slide, ESPN is taking a hit.
With the virus, things will now go from bad to worse for the sports channel. That’s because sports leagues are suspending operations left and right to help contain the spread of the virus.
Already, the NCAA has canceled its spring college championships, including the highly popular March Madness basketball tournament.
The professional baseball and professional basketball leagues have suspended their operations for the time being. The professional golfing league canceled one of its major championships. And more shutdowns are coming.
That’s terrible news for ESPN. For one, the channel has paid billions for rights to air live sporting events. In a cord-cutting world, live sports were one of the few things that made many subscribers stick around, as you couldn’t find it on streaming.
Also, what will ESPN’s anchors talk about all day when there aren’t any games or highlights to show? One of Disney’s top properties is set for a massive slowdown thanks to this virus.
Another problem for Disney is the cinema business. The company has absolutely cleaned up at the box office in recent years. That, in turn, sets the stage for more success in the future, as they can use their intellectual property to sell merchandise, promote attractions at its amusement parks, and so on. But the revenue funnel breaks down if people don’t go to see Disney’s movies in the first place.
And we sure do have a situation there. The numbers just came in for the latest Disney Pixar movie, Onward, and they were terrible. The movie did just $39 million in opening revenues, falling far short of $45-$65 million expectations. The figure was so low that it didn’t even top the previous worst Pixar flop, The Good Dinosaur that did $56 million in box office back in 2014.
Part of this is on Onward, of course. Reviewers generally liked the movie, but it didn’t catch on with a mass-market audience. Regardless, the degree to which it missed even its low expectations goes to a broader point: Who is going to go to the movie theater right now as long as this virus is spreading?
Just look at the stock price of cinema chain AMC (NYSE:AMC), which has fallen from $17 to $3 over the past year. Making matters worse, Disney announced this past week that they are stopping production on new movies until the virus passes.
That’s not all. Disney also faces a problem with its Disney cruise ship business. As you’ve probably heard, the cruise lines are reeling. Shares of companies such as Royal Carribean (NYSE:RCL) and Carnival Corporation (NYSE:CCL) have lost more than half their value in recent weeks. Cruise ships are a particularly dangerous environment given the virus, and operators and suspending cruising altogether.
Disney has followed suit with its own cruise ship business. They will be suspending all cruises through at least the end of March, with eight voyages already canceled.
Disney Stock Verdict
The problem for Disney is that it has coronavirus impacts on various fronts. If it were just Disney cruises, or just movie ticket sales, or a slowdown at ESPN, this wouldn’t be a major deal. But Disney is getting battered on all sides.
Ironically, the one big Disney business that is immune to the virus, streaming, is losing hundreds of millions of dollars a year. This wasn’t a problem previously because Disney had such robust cash flows from its other businesses. But with the theme parks likely closed for much of the next quarter and other revenue streams such as cruises also disappearing, Disney’s quarterly earnings could be downright scary.
To be fair, Disney is still a great company, and it has wonderful assets, particularly in terms of its intellectual property. But this coronavirus is a perfect storm for the company, smashing its business on many fronts. Other stocks are likely to bounce back much more quickly than Disney, and as such, there’s no rush to buy the dip.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he had no positions in any of the aforementioned securities.