Following the devastation of the novel coronavirus, one wouldn’t expect Disney (NYSE:DIS) to perform that well. After all, in fiscal year 2019, the company’s theme parks and resorts business accounted for roughly 37% of total revenue. Fast forward one year later and this business only represents 23% of top-line sales. Fundamentally, this isn’t a great look for Disney stock.
Yet in many ways, DIS is one of the biggest surprises of 2020. Despite disruptions from Covid-19, which has now caused multiple shutdowns of the iconic Disneyland due to California’s strict mitigation measures to combat a crisis that is out of control, Disney stock is up double digits on a year-to-date basis.
Fortunately, positive vaccine developments, particularly from Pfizer (NYSE:PFE) and Moderna (NASDAQ:MRNA), contributed to the enthusiasm for Disney stock. While Disney levers a world-renowned brand, that alone isn’t enough to convince a majority of vacationers to return to environments featuring big crowds. With vaccines, though, management can reasonably forecast when its star business segment can go back online.
However, the bigger catalyst for Disney stock is the electoral victory of Joe Biden. Throughout his campaign, Biden promised to listen to the science in tackling Covid-19. Even the jokes made about him – that he’s in a basement or that he’s wearing the biggest mask ever – played into this overall message.
Plus, Biden will likely normalize relations with China, which is a key market for Disney.
However, just when things seemed to be looking up for Disney stock, a headwind popped up from within: shareholder Abigail Disney.
Harsh Words for Disney Stock
For various reasons, many folks don’t care for the Mouse House. But few of those critical voices have as much influence as Abigail Disney. Her grandfather, Roy O. Disney, co-founded the iconic firm with his brother Walt. Despite this familial connection, Ms. Disney is no stranger in expressing concerns about the company’s corporate practices.
In an interview with Hollywood Reporter’s editor-at-large Kim Masters, Disney stated that the coronavirus exacerbated her fears about the company’s future:
I don’t believe that the company and the magic can survive this kind of corporate behavior, I don’t think that the brand, as solid gold as it is, will last. And it is the kind of brand that is so enormous and all-encompassing and people invest so much into it, I don’t think it will erode slowly, it will fall over like a great sequoia … I am a little bit about saving the company over the long term. I think the company needs to be saved from itself.
One of Disney’s biggest concerns is the massive wage gap between executives and the hourly employees which make the company’s high-contact businesses work. In a brutal takedown, Disney declared:
When I try and draw a direct line between how the C-suite is paid and how the hourly workers are paid, when I try to draw a direct line between some of those things, I think they look at me like I am speaking in some kind of alien language, because to them that is the dumbest thing they have ever heard. To them there is no relationship between what we pay a line worker or a shift worker and what we pay Bob Iger.
Ouch. Even worse, millennials care deeply about corporate social responsibility, which includes factors like governance. Ticking off this crowd wouldn’t be ideal for Disney stock.
A Plus in Disney+
To be fair, Disney isn’t the only place where such corporate shenanigans exist. While I hear Abigail Disney and sympathize with the spirit of her argument, the U.S. is the worst offender in terms of the gap between CEO compensation and the average worker’s salary.
This isn’t meant to excuse Disney the company. It’s just that if the compensation gap is your reason to avoid DIS, there’s a long list of companies you’d need to steer clear of.
But if you can stomach the governance issues, Disney stock might be something to consider for your new normal portfolio. While the future of its parks and resorts business is cloudy at best, the Disney+ streaming business provides investors with something to think about.
Primarily – and thanks to the Covid-19 crisis – the service exceeded all expectations. As of the most recent fiscal fourth quarter of 2020, Disney+ attracted 73.7 million worldwide subscribers. In total, the company’s streaming services command 137 million subs. And management provided new guidance that estimates this figure to hit 300 million to 350 million by fiscal 2024.
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It may very well get there, and possibly above the top range of the guidance. After Netflix (NASDAQ:NFLX) gained at least 25 million, it took 14 quarters until the streaming giant broke above the 70 million sub mark. On the other hand, it took Disney only three quarters to reach nearly 74 million subs after hitting 26.5 million in Q1 2020.
Again, Covid-19 certainly helped, there’s no doubt about it. But thanks to Disney’s enviable entertainment portfolio, Disney+ is on a blistering upside pathway.
Worth a Chance
Given its shoddy business practices and a significant revenue risk to the pandemic, Disney stock isn’t for everyone. Plus, a correction in the broader market – which in my humble opinion is a real possibility – could negatively impact shares.
At the same time, the Mouse House is one of those cradle-to-grave investments. Kids love it and their parents do, too. And with relevant content making Disney+ one of the must-have platforms for contactless entertainment, DIS is worth a shot.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.
