Disney (NYSE:DIS) has strong, negative catalysts in the short-term and the long-term, and it’s possible that one of the short-term negative catalysts for DIS stock will cause its longer-term outlook to deteriorate further.
Specifically, I think that the crisis caused by the coronavirus could hurt the company’s TV and movie revenue for a long time.
Disney’s parks and movies businesses are obviously being crippled by the coronavirus crisis since all of its parks and most movie theaters worldwide are closed.
Reflecting these short-term catalysts, Guggenheim Securities recently downgraded its rating on the stock to “neutral” from “buy” and slashed its target on the shares to $100 from $160. Guggenheim noted that Disney “has been particularly hard hit by the pandemic, [which has] impacted…virtually every segment” of the company.
Indeed, even ESPN, the company’s largest single revenue source, has likely been hurt by the epidemic. With all major sporting events canceled across the U.S., the channel’s advertising revenue has undoubtedly plunged.
Long-Term Negative Catalysts
I’ve long noted the problems and risks that Disney is facing due to cord-cutting. For example, in a February column, I pointed out that ESPN’s subscriber base had “tumbled 4.5% YOY in Q1, versus a 4% YOY decline during the previous quarter and a 2.5% drop in the quarter before that.” I also noted that the “financial results of its legacy broadcasting business had fallen YOY in Q1.”
Despite the huge popularity of Disney+, the streaming channel is a huge money-loser for Disney. The company doesn’t expect Disney+ to be profitable until 2024. Over the long-term, cord-cutting is likely to accelerate, greatly undermining the company’s most lucrative business, TV. And Disney+ is unlikely to come to the rescue anytime soon.
COVID-19 and Disney Stock
Many consumers who are stuck at home could more fully explore the wealth of streaming content that’s now available to Americans.
Netflix (NASDAQ:NFLX), Hulu, YouTube and Amazon’s (NASDAQ:AMZN) Prime Video are far from the only games in town now. There is a wealth of new, free or low-cost options, including Roku’s (NASDAQ:ROKU) Roku Channel, Pluto TV, Plex, and, for sports fans, Disney’s own ESPN+.
Additionally, multiple major news channels have a significant amount of free and low-cost content available for cord-cutters. So after having plenty of time to explore all of this content during the coronavirus crisis, tens of millions of more Americans could discover, as I have, that they can live fulfilling lives without cable or satellite TV.
And the recession will only accelerate that trend as more Americans look for ways to save money, paying $60-$80 less per month for TV content will be very appealing.
Finally, Disney’s movie revenue may very well drop meaningfully, at least in the medium term. Due to a combination of continued fear by some of large public events, a weaker economy, and the fact that many consumers will get used to watching more movies at home, Disney’s movie revenue could very well slip meaningfully for some time.
In fact, a recent survey of 1,000 American consumers found that 49% of the respondents would not go back to theaters for “a few months” and 28% said they would go to movie theaters less often after the epidemic is over.
The Bottom Line on DIS Stock
Disney definitely has strong, negative catalysts that will hurt its results meaningfully in both the short-term and the longer term.
Moreover, the negative catalysts spurred by the coronavirus could impact Disney’s results for a much longer than expected period. With Disney stock still trading at a forward price-earnings ratio of 23, which is above the market’s average, I think that investors should sell the shares.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks and Snap. You can reach him on StockTwits at @larryramer. As of this writing, he did not hold a position in any of the aforementioned securities.
