[Editor’s Note: This article was updated on May 18, 2020, to correct the average revenue per user figure.]
Walt Disney (NYSE:DIS) is dragging itself through a rough patch right now. The novel coronavirus has hit DIS stock from three different angles, resulting in a near-30% decline from its February highs. But it’s not quite time to buy Disney. At $100 per share, the market hasn’t fully priced in the pain ahead.
Unfortunately for Disney, coronavirus has hit it where it hurts most — in its Parks, Experiences and Products arm. That segment normally represents around 35% of the firm’s overall revenue each quarter. With the firm’s theme parks completely shut down around the world, it was no surprise to see revenue for that segment declined 10% from last year.
That’s not where the pain ended, though. The firm’s cable and broadcast segment also took a hit, though you wouldn’t see that based on numbers alone. While the division reported year-over-year growth, it’s important to note that the growth is almost exclusively due to the company’s purchase of Fox networks. The cancellation of all live sports has hurt ESPN and advertising spend overall was weak.
The final blow to Disney came in its film and studio arm, where not even its merge with 21st Century Fox was enough to offset the coronavirus casualties. Operating income in that segment was down 8%.
What’s Next for Parks
Disney investors should be most focused on when the firm can get back to business as normal, but like everyone else, this earnings season, Disney’s management wasn’t able to give a clear answer. Shanghai Disneyland is scheduled to reopen next week, but so far there’s no indication of when its other parks will follow suit.
If the timeline of events in China is anything to go by, we can expect to see Disney’s U.S. and European parks closed for the entirety of Q2.
Even the reopen of Disneyland’s Shanghai location doesn’t necessarily mean things are going to pick up for Disney. Without a vaccine on the table, coronavirus remains a threat to theme parks that rely on gathering huge groups of people.
Social distancing measures, coupled with more stringent hygiene rules, will make it difficult to make a profit. Nevermind the fact that many people will be too nervous to visit a crowded theme park with coronavirus still fresh in their minds.
Disney+ Can’t Undo the Damage
Of course, Disney’s blockbuster streaming service has been a beacon of hope for Disney shareholders as people around the world sign up in droves. The firm’s strong entrance into the streaming space is applauded, and has indeed been impressive. But investors are blindly cheering on a huge increase in subscriber numbers without questioning where those subscribers came from.
It’s worth noting that Disney introduced its streaming service just before the pandemic hit. So it should come as no surprise that millions signed up in March when they were confined to their homes, trying to work with their kids running around.
The question is, will those people carry on paying their subscription fees once life is back to normal? When the kids are back in school in September unemployment is likely to remain high. For many, a pay-cut or even the loss of their business will be weighing on their finances. Will they have room to pay for Disney+?
It remains to be seen. Especially since the production of new content has been halted, meaning we are likely heading for the first fall television season that won’t offer any new programming.
Disney+ Can’t Offset Parks Pain
Even in the rosiest of pictures, the Disney+ subscriber boom isn’t enough to offset the weakness in the rest of the firm’s business. Before coronavirus took its toll on the global economy, Disney estimated that its streaming service would contribute $4 billion in revenue over the next two years as it grew to somewhere between 60 million and 90 million paid subscribers by 2024.
In its Q2 results, Disney reported that Disney+ contributed $5.63 in average revenue per subscriber per month. That’s roughly $17 million per quarter. Even if you assume that Q3 will deliver $50 million because the service is absolutely booming, that’s not nearly enough to cover the massive losses that coronavirus is inflicting in the current quarter.
Management said it expects coronavirus to cost the firm $1.4 billion in the current quarter. Streaming gains will cover roughly 3% of that figure in a best-case scenario.
The Bottom Line on DIS Stock
With that in mind, I don’t think DIS stock is a buy just yet. The current quarter is likely to be a rough one as the company continues to deal with lost park revenue, lower advertising revenue, and a lack of live sporting events.
For that reason, investors should consider waiting for DIS stock to drop into the $90-range before picking it up. Once Disney makes its way into double digits, the upside potential looks more likely as it implies the firm’s struggle throughout the remainder of the year has been fully absorbed by the market.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.
