Summer is the time when many families look to kick back, go on vacation, and enjoy hours of leisure watching favorite shows and movies. While consumer demand for travel and entertainment may have been pent up from the Covid pandemic during 2020 and 2021, our first post-pandemic summer has been beset with record inflation and the threat of a looming recession. In this tug-of-war, will our desire for entertainment win out?
A look at Disney, the titan of American entertainment. Is DIS a buy?
Disney has fallen considerably from its peak of over $180 per share in 2021, though that's par for the course for most stocks. If you look at its growth from the Great Recession in 2009, DIS has roughly quintupled in value. Since going public in 1957, the stock has been on a long-term upward trajectory.
While some investors may shy away from DIS because they question the continued popularity of its theme parks and animated movies, Disney is actually highly diversified. In addition to its traditional lineup of family-friendly movies, Disney controls the output of 21st Century Fox, National Geographic, FX, and Hulu. Oh, and it also owns the Marvel cinematic universe and Star Wars.
Net Income and Dividends
Although Disney owns a lot of content, its net income (income minus expenditures) has struggled in recent years. After 2019, it also suspended its quarterly dividends, which it had maintained for the previous 40 years. This struggle for Disney is likely linked to the crash in movie theater attendance due to the pandemic. And Disney also had to restrict attendance at its iconic theme parks during the pandemic, further reducing revenue. Will fans return to theaters and Disney theme parks this summer?
Disney's long-term strength is likely found in its streaming portfolio, headed by Disney+. In Q1 2022, Disney reported almost 8 million new subscribers. This news comes on the heels of the struggles faced by rival Netflix, which lost subscribers for the first time during the same quarter. If former Netflixers are looking for a new streaming home, Disney has a chance to woo them with its bundle. Subscribers can get Disney+, Hulu, and ESPN together in a package.
But the pressure is now on Disney to produce lots of new content, similar to Netflix. While Netflix is now producing several new hit shoes, including Stranger Things, Disney has only produced a handful of limited series based on its Marvel and Star Wars lineup.
The fact that Disney stock has fallen almost 50 percent from its all-time high means there is plenty of room to grow. Thus, the stock is likely undervalued, and should rise in the short run.
Some investors may have been spooked by Disney's widely-publicized spat with Florida governor Ron DeSantis. For those who missed it, the Florida legislature voted in April to remove Disney World's Reedy Creek Improvement District, a special district that allowed it to assess property taxes and provide municipal services. However, analysts quickly reported that existing Florida law did not allow the state to eliminate a special district without taking over the district's debts. Reedy Creek holds about $1 billion worth of bonds, which the state of Florida must figure out what to do with. Bondholders have sued governor DeSantis, alleging that his political machinations threaten their interest payments. Thus, it doesn't look like Disney World will face much of a hit from an angry DeSantis.
The Bottom Line: Long-Term Buy
Thanks to its diversified holdings and the strong likelihood that its share price is undervalued, Disney is a buy. Its Marvel lineup has proven to be a solid money-earner, and Star Wars fans run the gamut from young children to Baby Boomers. With many viewers having cooled on Netflix, Disney has the chance to win new subscribers by combining its streaming services. And although gas prices and inflation may put a crimp on trips to Disney theme parks this summer, there's always 2023.
I/we have no positions in any asset mentioned, but may initiate a position over the next 7 days