Disney’s stock price has been on a rollercoaster ride since the coronavirus pandemic began, but has it hit its bottom yet, or should investors hold out?
To say it’s been a rocky ride for Disney (NYSE: DIS) of late would be an understatement. Having hit all-time highs of $151.64 per share back in November, the ‘House of Mouse’ has since seen a pandemic wipe out most of its revenue, allow Netflix (NASDAQ: NFLX) to overtake it in value, and had all its parks shut down. Despite rising nearly 4% in the past month and clawing its way past Netflix once more, Disney stock is still 20% down year-on-year; but there are signs of life.
Don’t call it a comeback…
No seriously, don’t! Disney was, and still is one of the most recognizable names in business, alongside industry leaders such as Microsoft (NASDAQ: MSFT), Nike (NYSE: NKE), or Starbucks (NASDAQ: SBUX). A few months of decline won’t change that, so there was never need for a comeback.
However, if you do wish to still call it a comeback, it’s not, because Disney still has a long road ahead of it.
Since its March lows of $85.76 per share, Disney has been on a gradual rise, growing nearly 26% in less than 2 months as of May 12. Investors were pleasantly surprised to hear that the company’s Shanghai park would be opening again on May 11, and even more so when both opening days had sold out. It was almost enough to make investors forget that the company’s profit fell 91% in Q1.
There was only one problem with this news of ‘sell-out’ days. The park is only operating at roughly 25% capacity, which means that ‘sold-out’ today means only one-quarter of the revenue ‘sold-out’ meant in January.
What does this mean for other companies?
This idea that Disney is reopening has both positive and negative implications. Let’s start with the bad first:
By opening at 25% capacity and labeling it as ‘sold-out’, investors are led to believe that the economy will simply slot back into gear once pandemic restrictions are lifted. That restaurants, planes, and hotels will suddenly be filled.
This won’t be the case, not for some time at least. That same caveat presumably crossed the minds of many investors of Norweigan (NYSE: NCLH), Royal Caribbean (NYSE: RCL), and Carnival Cruises (NYSE: CCL), which have taken a beating during the pandemic.
After Carnival announced this week it would restart some cruises in August, bookings reportedly spiked 600% compared to the previous 3 days before the news, and suddenly cruises were ‘sold-out’. However, with these cruises likely operating on limited capacity, are they really sold out, or will a ‘sell-out’ here be but a fraction of the usual revenue? Not only that, but it is reportedly selling rooms for as little as $28 per night. The same questions will be asked of the major airlines like Southwest (NYSE: LUV) or Delta (NYSE: DAL) whenever they start opening back up.
These reports from Disney et al. show how critical it is for these businesses to get moving, restore the buying public’s confidence, and indicate to creditors that it’s all going to be alright. We have seen the market rally incredibly since March, but this does not reflect the dour state of the economy, which is why investors should brace for potential further declines when Q2 reports show that money is still not flowing in a way we would like it to.
There is still a lot of upside
I don’t want to be all doom and gloom, so let’s end with a focus on the positives. When all of this started, we had no idea when businesses could get back to normal, but less than three months into lockdown, signs of life are returning. Even Apple (NASDAQ: AAPL) announced this week that it would be reopening stores, while CEO Elon Musk is trying every move in the book to get his Tesla (NASDAQ: TSLA) factories up and running again.
Getting back to Disney, despite the mess that was its latest quarter, the company has rarely been available at such a bargain price. Free cash flow may have fallen 30% to $1.91 billion, but revenues were up 21% year over year in its new direct-to-consumer streaming platform (Disney+, Hulu, and ESPN+) and media networks. In beginning to create this new direct-to-consumer empire, Disney is slowly but surely lowering its exposure to physical market restrictions.
There is some way to go yet, and Disney+ is years from profitability, but should it continue to build on its already 55 million subscribers, and become as large as Netflix, that will be a comfortable nest egg for ‘the happiest place on earth’. For now, the company must gradually rebuild its Parks segment and hope that it still sells out at full capacity.
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