These are terrible times for The Walt Disney Co. (NYSE:DIS), but not so much for DIS stock. The company lost $2.8 billion, $1.57 per share, on operations during its 2020 fiscal year, which ended in September. Only the magic of accounting let it report a profit of $2.02 per share.
The company continues cutting back. In late November, it increased its layoff figure to 32,000. Longtime TV and movie executives call it a “bloodbath.” Radio Disney is shutting down. Cruising is off at least through February.
Despite the flood of red ink, shares are up 22.5% over the last six months. That’s stronger than the S&P 500, which is up 15%.
Buying the Story of DIS Stock
Investors are buying Disney’s story of transformation. The key phrase in reports on earnings was that they “beat expectations.”
The most important number was 73 million. This is how many households had subscribed to Disney+, the company’s streaming service, by the end of September. This came at a cost. Operating losses in direct-to-consumer were $580 million. Disney is making the service a loss leader. The average subscriber paid just $4.52 per month.
Compare that with Netflix (NASDAQ:NFLX), which ended September with over 200 million members, and just pushed through a price increase to $14 per month.
Reporters keep writing about Disney’s “streaming success,” but it still has just half of Netflix’s subscribers, even when ESPN’s ESPN+ and Hulu are added. It’s also charging less. Investors — and management — are betting subscriber numbers can keep rising, and that Disney can then push through dramatic price increases without losing anyone.
To keep the numbers rising, Disney+ will soon debut in Southeast Asia. Taking a cloud service global costs less as time goes on, even when it’s a subscription service. But Disney+ has a long way to go to match the localization efforts of Netflix or even Amazon (NASDAQ:AMZN) Prime.
Betting on the Comeback
If this is the bottom, however, and 2021 brings an end to the pandemic, DIS stock is a coiled spring. Revenue from “parks and experiences” was $26.2 billion before the pandemic, and just $16.5 billion during it. Studio revenue was cut by more than half during the September quarter, and could quickly return. Revenue from media networks, both cable and broadcast, were up 14% for the year, reversing previous declines.
That’s why 15 out of 19 analysts at TipRanks still rate the stock a strong buy, despite their average price target being just $2 per share above the Dec. 7 opening price. None are saying sell.
Revenue for the December quarter is expected to be $14 billion, about what it was in 2018. Parks revenue is expected to be $2.2 billion, just one-third of what it was a year ago. But the stock has still stayed strong even with the twice-annual dividend being cut for 2020.
The Bottom Line
Investors believe that Disney, after its latest “reorganization,” is poised to get its revenue back to near-normal levels on lower costs. That would mean fabulous earnings as 2021 rolls along. They figure it can match Netflix on subscribers and eventually hike prices to bring more profits.
That’s a lot of assumptions. After the pandemic, DIS stock will still face the problem of cord-cutting, which is why it launched Disney+ in the first place. Media networks are still the biggest piece of Disney, with $28 billion in revenue last year, against $17 billion for direct-to-consumer and international.
Executive chairman Bob Iger recently told friends the networks were “over,” that Disney is now all about streaming and theme parks. When will that company be as big and profitable as the old one? The stock price says very soon. Business reality says not for some time. Disney is highly vulnerable to a general market downturn.
At the time of publication, Dana Blankenhorn had a long position in AMZN.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn.
