Editor’s note: This column is part of InvestorPlace.com’s Best Stocks for 2021 contest. John Jagerson and Wade Hansen’s pick for the contest is Disney (NYSE:DIS) stock.
The bullish spell on Wall Street that sent the S&P 500 higher and higher during most of 2021 was broken by a Chinese company that most individual investors had never heard of: Evergrande (OTCMKTS:EGRNY).
Evergrande is a Chinese real estate developer with $300 billion of debt on its books and nowhere near enough cash on hand to cover the payments. This wouldn’t usually be a concern for U.S. stock investors, but analysts started to worry.
They worried that an Evergrande debt default would cause bearish knock-on effects that could ripple throughout the global financial markets. They worried that Evergrande could become the next Lehman Brothers.
That concern caused stock investors to panic and start selling on September 20.
The panic only lasted a few hours as the Chinese government stepped in to quell fears that the demise of Evergrande would cause a global contagion. But the damage was already done for investor sentiment. The bullish spell had been broken.
With Wall Street no longer believing in eternal uptrends and interest rates rising after the Fed indicated it will be tapering its bond-buying program, the magic of Disney (NYSE:DIS) has lost some of its potency. Traders are now being much more demanding when it comes to fundamental analysis and their expectations for the future.
To attract new buyers and push their stock price higher, companies are going to have to convince investors that their growth outlook is not only good, but great.
Unfortunately for DIS stock, its growth outlook is just good… for now.
Disney+ and Hulu
Wall Street loves companies with subscription models that generate monthly/annual revenue. Why? Because that revenue is consistent. You know it’s going to keep coming in month after month, year after year.
DIS has taken advantage of this trend by transforming itself into a subscription model powerhouse over the past few years via its streaming video platforms and movie franchises.
DIS started its direct-to-consumer subscription gambit by joining Hulu in 2009. The company experienced some growing pains, but Hulu ended up pummeling most of the subscription services other individual networks were trying to offer.
In March 2019, DIS became the majority shareholder in Hulu when it bought 21st Century Fox. Shortly afterward in May 2019, Comcast (NASDAQ:CMCSA) 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 ownership of the company — and its profits.
But gaining control of Hulu isn’t enough for DIS. The company decided to go head-to-head Netflix (NASDAQ:NFLX), HBO and others with Disney+. And Disney+ has surpassed everybody’s wildest expectations.
After its first day of operation in November 2019, the company delighted Wall Street by announcing Disney+ had more than 10 million subscribers in just one day.
Fast-forward to today and DIS has more than 116 million subscribers. You can see why traders have been pushing the stock higher and higher over the past year and a half.
Unfortunately, DIS “hit some headwinds” during its latest quarter, according to CEO Bob Chapek, and the company now expects new subscriber growth to slow. This calls into question the company’s goal of reaching 230 million to 260 million active subscribers by the end of fiscal 2024.
Movie Franchises & New Releases
The company is complementing Disney+ 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. But then the company realized it could capitalize on its own success by making movie franchises.
Frozen was a smashing success so why not make Frozen 2?
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?
Those are only the tip of the iceberg. More and more spinoffs and Disney+-exclusive shows and movies are being planned and released. Disney knows fans of the Marvel Cinematic Universe and its other intellectual properties will keep coming back.
By combining movie franchises and new releases with its Disney+ streaming service, DIS has been able to compete with powerhouses like Netflix and Amazon Prime.
Theme Parks and Hotels
While the company’s subscription-model products have driven much of the recent growth in DIS, 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. Walt Disney World in Florida was only open to a reduced number of visitors.
Now that more and more people are getting vaccinated and state governments have begun to ease their restrictions, DIS has reopened 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 Galaxy’s Edge attraction at Disneyland and Walt Disney World. In a post-pandemic world, plenty of 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 rebound to those levels in 2021, the sky’s the limit for DIS stock this year.
The Bottom Line on DIS Stock
With Wall Street demanding stronger growth outlooks, we don’t see DIS jumping back up to challenge its recent high of $203.02 in the near term. Instead, we see DIS holding its ground and consolidating sideways.
If conditions change on Wall Street and bullish sentiment begins to increase again, that could lift DIS higher. But for now, DIS is simply set to remain stable.
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.
