Walt Disney (NYSE:DIS) stock is a big favorite among analysts looking at 2022. It’s down 19% in 2021, because Covid-19 variants are keeping people out of theme parks and movie theaters. But that’s not expected to continue next year. Disney’s streaming customer count is still growing, and its prices are starting to rise.
To bulls like TV’s Jim Cramer, this means growth catalysts are built-in. The assumptions that powered the stock in 2020, when it beat the S&P averages, are finally in place. That means it’s time to buy.
But is it?
The Bull Case
DIS stock was especially weak during November, falling 20%. This has only made the bulls more confident. There are two reasons for optimism. Disney+, the streaming platform built on the company’s existing film library, is a hit. It should have 120 million subscribers by the end of the year. The total subscriber count on all Disney streaming services, which includes Hulu and ESPN+, is 180 million.
Slowing streaming growth was responsible for the stock’s plunge during November. But it’s assumed by the bulls that Disney’s international efforts have barely begun to bear fruit. New content from all Disney studios will also be hitting the platform late next year.
Then there is travel. Air travel numbers have been rising all year but are only now approaching pre-pandemic levels. Before the pandemic, Disney’s parks represented 40% of the business. In the most recent quarter, it was below 30%. The parks only became profitable again later in the fiscal year, which ended in October. But in the fourth quarter those operating profits were 25% of the total.
The Bear Case
The bear case is contained inside the bull case. Bringing content from Disney, Marvel, Star Wars, Pixar, and National Geographic, bought as part of the Fox deal, all at once will be expensive.
Some of this is content delayed by the pandemic. But it’s also the biggest risk the company has ever taken. The Fox deal also brought a lot of “adult” content to Disney, along with a quandary. It needs to grow that grown-up business to keep pace with Amazon.Com (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX). But will that destroy its family-friendly image?
Speaking of Netflix
Netflix has been Disney’s chief bugbear. On Dec. 17, its market capitalization of $259 billion was just short of Disney’s $267 billion.
Content is the main cost driver for both companies, and Netflix has been taking bolder steps to hold those costs down. This includes buying Scanline VFX , a special effects workshop that also works for Marvel, and new studios in Albuquerque, NM.
Netflix seems to have better assets in virtual reality, mixed reality, and artificial intelligence than Disney. As entertainment enters the third dimension during the 2020s, this could prove a telling advantage. Despite its higher price to earnings and price to sales ratios, Netflix stock is still rising faster than Disney.
The Bottom Line
I wrote in October that Disney is a defensive play in entertainment. That remains the case.
Disney has more earnings catalysts than other streaming players, but it also has more problems. Will it keep ESPN as gambling comes to dominate sports? Can it adapt its production to the new technology? Can it continue to sell America to an increasingly-divided world? The move from cable to streaming also remains incomplete. Disney revenue from ESPN and ABC remains tied to cable.
It’s likely that DIS stock will shine in 2022, as the bulls contend, because it has fallen hard in 2021. But it’s not certain.
On the date of publication, Dana Blankenhorn held a long position in AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. Just in time for the holidays he has a collection of COVID-19 stories at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.
