Walt Disney Stock is Being Kept Aloft by the Power of Magical Thinking

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Walt Disney (NYSE:DIS) reopened its theme parks in the middle of a pandemic. DIS stock analysts took this as a sign of confidence rather than desperation.

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It’s all part of the magical thinking that has kept Disney shares expensive through the crisis. The stock fell to a low of $85 in March, but opened July 13 at over $120. That means the stock has recovered two-thirds of its pandemic loss even while analysts anticipate a loss of 42 cents per share on 20% less revenue, or $15.9 billion.

Even that estimate may be optimistic.

I Don’t Get It

How can Disney’s revenue be down so little when its parks were closed for a quarter, and usually represent a third of its total? How can revenue be down so little when movie theaters are shuttered and there’s no sports? How can revenue be down so little when cord cutting continues and Disney is still bundling its streaming services at a single Netflix (NASDAQ:NFLX) price?

Some of the magic lives in Disney’s first quarter report, its last pre-pandemic print. What it called “direct to consumer” revenue quadrupled, thanks to the bundle of ESPN+, Disney+ and Hulu. Yet revenue from media networks, mostly cable, rose 24% and studio revenue doubled.

For the June quarter, media network revenue must be down. Studio revenue should be near zero. So should revenue from the theme parks. Even if direct to consumer revenue doubles, with an exclusive on the musical Hamilton, it can’t make up for that. (The play was originally bought for theater presentation.) Disney was getting $9 a month for its sports networks for each cable subscriber, while charging $5 a month for ESPN+.

Happy Talk Inside the Bubble

We’ll know about the actual numbers on Aug. 4. Until then we have the re-opening of the parks.

That’s what Wall Street is focused on right now. To investors, the move seems brilliant. The worst is over, they say. Buy, buy, buy.

What Disney calls its “bubble” is already open for NBA and Major League Soccer stars. They will be quarantined at the company’s Florida resort while they finish their seasons without fans. While some have joined in the happy talk, two of the soccer teams have already been sent home. At least one more match has been postponed by a positive test for COVID-19. The NBA says 25 of its players have tested positive, and doctors are worried about long-term side-effects.

Reviews on the re-opened parks are, frankly, sad. No parades, no meeting the characters, keep your mask on and dining choices are limited. Inside the costumes, actors are restive. As the U.S. parks re-open, infections in Florida and California spike. Did you know Disney has a cruise line, too?

The Debt, My Gawd, the Debt

Then there’s Disney’s debt. Disney had $41 billion more debt than cash at the end of May. Remember that it bought out Fox Entertainment right before the pandemic.

The Federal Reserve has been buying some of that debt as a way to get the economy through the crisis. Disney revenues aren’t expected to return to pre-pandemic levels for a year and that debt will remain on the books.

The Bottom Line on DIS stock

I don’t get the optimism about DIS stock.

The pandemic is going to roll on for at least two more quarters. Disney isn’t making up for its lost revenue in media networks with streaming and won’t until it starts hiking prices.

But at a market cap of $215 billion, Disney is trading at three times its pre-pandemic revenue. At some point investors are going to look down into the reality of this situation and sell.

I won’t consider buying Disney until all the bad news is in the stock. My rose-colored glasses are broken and the elves who fix them are backed-up and still working from home.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story. 

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


Article printed from InvestorPlace Media, https://investorplace.com/2020/07/dis-stock-and-the-power-of-magical-thinking/.

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