Overzealousness Might Hurt Disney Stock in the Nearer Term
If you were considering candidates for lifetime stocks, I believe Disney (NYSE:DIS) would rank highly among most investors’ lists. Levering one of the most iconic and powerful brands in entertainment, DIS stock, especially with the Magic Kingdom’s key acquisitions, remains a reliable pick. I’m not going to deviate from that general assessment. However, some recent developments have forced me to adopt a tactical view.
First, let’s talk a bit about the company’s fiscal third quarter of 2019 earnings report. On paper, Disney delivered a comprehensively bad miss. Against a per-share profitability target of $1.75, actual earnings per share came in at $1.35. Additionally, the House of Mouse missed its consensus revenue target of $21.47 billion, delivering only $20.25 billion. Not surprisingly, Disney stock fell on the disclosure.
A few days following Q3, DIS stock remains choppy. Again, I don’t think that’s a surprise. One of the overriding themes of the last earnings report was paying the piper. For instance, management explained the earnings miss because of the still-ongoing integration of Fox’s entertainment assets.
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Put differently, bulls – including yours truly — loved Disney stock because the move would create a content empire. But now the company has to pay for it, and that’s not such a pleasant thing.
Even more worrisome in my opinion is Disney’s streaming business. In Q3, the company showed increasing losses in this segment due to strong investments toward Hulu, ESPN+, and Disney+. With the red ink already on the books, the streaming investments put extra pressure on DIS stock.
Why? Because they’re going after Netflix (NASDAQ:NFLX) at a time when their theme park demand is showing cracks.
DIS Currently Has More Questions Than Answers
For years, Disney stock represented at least a double threat. With their acquisition of Lucasfilm, and more recently Fox’s entertainment assets, DIS levered an unprecedented content dominance. Although the cineplex has lost its luster over the years, Disney-backed movies have conquered the box office.
Furthermore, Disney has their universally-appealing theme and resort parks. A few months back, the Magic Kingdom jacked up their ticket prices. I argued that it won’t matter because people will still find a way to get in.
And now, DIS is aggressively moving into the streaming game. In order to successfully disrupt Netflix, Disney dropped the hammer. Combining Disney+, ESPN+, and an ad-supported version of Hulu for $12.99, management hopes to steal market share from Netflix. Obviously for the same price, Netflix subscribers only get one service.
Under normal circumstances, I’d support the aggressive move. However, Wall Street is taking a dim view of Disney stock because of the underlying company’s overzealousness. With such pricing – which almost screams cannibalization – this strategy won’t help the trend of red ink we saw in Q3.
More importantly, Disney is showing cracks in its previously unassailable theme parks. According to a FoxBusiness report, Disneyland’s latest attraction, Star Wars: Galaxy’s Edge Land, is a flop.
The report cites some damning evidence for their claim. According to DIS employees, wait times for heavily advertised rides were about half the forecasted time. Moreover, Disney has cut workers’ hours, even for those who’ve been with the company for years.
It could be that when Florida’s Disney World launches the same attraction, customers will flock to it. However, with the U.S.-China trade war raging, I expect a reduction in international visitors. Either way, Disneyland’s miss is a distraction when the parent company is waging all-out war with Netflix.
How to Approach Disney Stock
Despite my concerns, I don’t think there’s a reason to panic on Disney stock just yet. If anything, I’d recommend trimming my exposure just a hair. Although I love the company’s comprehensive strengths, at this moment, they’re doing too many things at once. Unfortunately, we’re not seeing much success in these disparate endeavors.
However, if you don’t own DIS stock and you’re looking to buy, my idea is much less ambiguous: stay on the sidelines for now. With both internal and external (i.e., trade war) pressures, I think Disney stock risks testing its 200-day moving average. Right now, this level translates to about $122.
Ultimately, what we have here is a timing issue. Several expensive investments are coming to the table, along with an aggressive disruptive strategy. Let the markets fully digest the news, which implies nearer-term volatility. But around the $120 level, I’d say DIS appears more compelling.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
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