The first half of 2021 was dominated by volatility across the board and profit-taking on the big winners. Walt Disney (NYSE:DIS) got caught up in some of that, but it appears that pullback may be coming to an end.
Most of the profit-taking seems to have been driven by concerns that inflation was getting out of control and was going to persist through the rest of the year.
However, those fears seem to be fading as the global economy is getting back on track after shutting down during the coronavirus pandemic.
You can see this change in inflationary expectations playing out via the 10-year Treasury yield (TNX). After rising dramatically in early 2021 as investors braced for the Federal Reserve raising rates to combat inflation, the TNX has been pulling back in a down-trending channel.
This recent pullback shows investors are no longer concerned that inflation is going to be a runaway issue.
If this trend continues, it leaves the door wide open for investors to move back into the stocks, like DIS, that are still fundamentally sound but pulled back on profit-taking.
So how do the fundamentals look at DIS? Let’s take a look…
Subscription-Based Revenue from Disney+ and Hulu
Wall Street continues to love companies that can tap into a subscription model to generate monthly or annual revenue.
Why? Because the revenue is consistent. You know it’s going to keep coming in month after month, year after year.
DIS has been slowly building into a subscription powerhouse over the past few years with its streaming video platforms and movie franchises.
DIS started its direct-to-consumer subscription gambit by joining the Hulu group in 2009. The company experienced some growing pains, but Hulu ended up pummeling the subscription services most other individual networks were trying to offer.
In March 2019, DIS became the majority shareholder in Hulu when it bought 21st Century Fox. Shortly after, in May 2019, Comcast relinquished its controlling interest in the company to DIS.
Comcast is scheduled to sell its remaining interest to DIS by 2024, which will give DIS full control of the company, and its profits.
But gaining control of Hulu wasn’t enough for DIS. It decided to go head-to-head with Netflix (NFLX), HBO and others with Disney+, and wildly surpassed everyone’s expectations.
The company delighted Wall Street after its first day of operation in November 2019 by announcing Disney+ had more than 10 million subscribers.
Fast forward to today when DIS has more than 100 million subscribers, and you can see why traders have pushed the stock up to new all-time highs.
This rate of acquisition won’t last forever, but the more subscribers DIS can bring in now, the more recurring revenue it’s likely to enjoy down the road.
Movie Franchises & New Releases
The company is driving its Disney+ success by coupling the streaming service with its movie franchises and new releases.
DIS used to be in the one-and-done movie making business. Snow White had no overlap with Robin Hood, which had no overlap with The Lion King. Then the company found out that it could capitalize on its own success by making movie franchises.
For example, Frozen was a smashing success, so why not make Frozen II? Everybody seemed to like Toy Story, Toy Story 2 and Toy Story 3, so why not break out of the bounds of a standard trilogy and make Toy Story 4?
Fans can’t seem to get enough of Star Wars, so why not round out the third, yes third, trilogy in the series with Star Wars: The Rise of Skywalker? But don’t stop there. Why not create even more spinoffs, like The Mandalorian, WandaVision and The Falcon and the Winter Soldier, that will only be available on Disney+?
By combining movie franchises and new releases – such as Cruella, Soul and Raya and the Last Dragon — with its Disney+ streaming service, which spans everything from the Marvel movie catalog to The Simpsons, DIS has found the holy grail of subscription-based entertainment revenue models.
Theme Parks and Hotels
While the company’s subscription-model products have been driving a lot of growth for DIS of late, revenue from the company’s theme parks and hotels has been stifled during the coronavirus pandemic.
Disneyland and most of the company’s other theme parks were closed for the first part of 2021. Even the flagship Walt Disney World in Florida was only open to a reduced number of visitors.
But now that more and more people are getting vaccinated and state governments have begun to ease their restrictions, DIS has been reopening its theme parks. Disneyland and California Adventure are now open to out-of-state visitors, after being closed for more than a year, and fans are lining up by the thousands to buy some Mickey and Minnie ears and ride their favorite rides again.
Just imagine the amount of pent-up demand there is to use some stimulus money to go see company’s new Star Wars ride at Disneyland and Walt Disney World. In a post-pandemic world, people will be happy to pay the ever-rising prices for admission and in-park purchases.
Before the pandemic, DIS’s U.S. and international theme park and hotel business was responsible for more than 34% of the company’s revenue and 37% of the company’s earnings. If that segment of the business can bounce back to those levels in 2021, the sky’s the limit for DIS stock this year.
Bottom Line on DIS Stock
After topping out in March 2021, DIS has pulled back as longer-term investors started taking profits off the table.
The stock pulled back to the support level established in late 2020 after DIS gapped higher in the aftermath of its blockbuster Disney+ subscriber announcement.
So the price chart has confirmed that support is still holding just below $170. We expect this support level to continue to hold while DIS generates more bullish momentum to climb back up to its recent highs.
On the date of publication, John Jagerson & Wade Hansen did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
John Jagerson & Wade Hansen are just two guys with a passion for helping investors gain confidence — and make bigger profits with options. In just 15 months, John & Wade achieved an amazing feat: 100 straight winners — making money on every single trade. If that sounds like a good strategy, go here to find out how they did it. John & Wade do not own the aforementioned securities.
