INTRO: Whether you watched every
Disney and Pixar movie or you just tuned into Phineas and Ferb here and there, for most of us,
Disney was a nostalgic part of our childhood. I
mean, who could forget their iconic theme parks that are scattered all around the word.
While these factors are what most of us remember about Disney, over the past few decades,
they’ve grown into basically every media industry you can think. From Marvel movies and Star Wars to
Disney+ and ESPN, Disney owns much of the modern media industry. This has put Disney in a pretty
unique position as they can thrive it basically any situation. If everyone is staying at home,
that’s perfect for Disney’s streaming services. Conversely, if everyone is going out, that’s
perfect for their theme parks and box office numbers. Despite this unique advantage, Disney
hasn’t been doing to well since the pandemic started. In fact, their net income crashed
from roughly $10 billion per year to as low as -$5 billion per year. They have since become
profitable again, but their current net income sits at just a fraction of their pre pandemic
numbers at $2-3 billion. Considering this, I don’t think you’d be surprised to hear that their stock
has gotten absolutely obliterated. Since their peak in early 2021, Disney stock has fallen
right about 50% which correlates to a market cap loss of $188 billion. So, here’s why Disney is
struggling on Wall Street despite owning a media empire and giving Netflix a run for their money.
UNDERWHELMING GROWTH:
One of the biggest issues plaguing Disney is their underwhelming growth atleast from the perspective
of investors. Likely the most disappointing sector for investors is Disney +. This is honestly quite
ironic given that Disney+ has been killing it eversince they launched. They’ve literally grown
from 0 to 137.7 million subscribers within a matter of 2.5 years. For perspective, it has
taken Netflix 15 years to grow to 200 million subscribers. While this is phenomenal growth,
many investors are worried about how Disney+ will perform in a post pandemic world. Last year,
we actually got a small taste of what may be ahead for Disney+ and it wasn’t that optimistic. If we
zoom back to q3 and q4 of 2021, we’ll see that Disney+’s subscriber numbers barely moved from
116 million to 118.1 million. This means that they only gained 2.1 million subscribers this
entire quarter which was a far cry from investor expectations of 9 million new subscribers.
But, wait a minute, why was subscriber growth so slow near the end of the year?
Well, the thing we have to keep in mind is that Disney’s fiscal quarters don’t exactly lineup with
the tax quarters that we’re familiar with. Our first quarter is actually Disney’s second quarter,
our second quarter is Disney’s third quarter and so on and so forth. So, when Disney reports their
third and fourth quarters of 2021, they’re actually talking about the second and third
quarters of 2021, so basically the peak of summer going into fall. As you would guess,
this is when people are most likely to travel and partake in social events given that that school
is off and the weather is nice. So, it makes sense that Disney’s subscriber growth slowed
down substantially during the summer months of 2021. If we look further into the graph, we’ll
see that subscriber growth picked up again in the winter months of 2021 and the start of 2022 when
Omicron was a big concern. But, as we approach the summer again, investors are worried that Disney+
may post subpar growth numbers once again. This fear is made even worse when you consider that
most people haven’t really gone anywhere since the pandemic started, meaning that we’ll likely see
above average travel this summer. Something else to consider is that many subscribers got Disney+
specifically because they had nothing better to do during the pandemic. But, as they return to
normal life, many of them are cancelling. It’s also not a great sign that Netflix just posted
their first subscriber loss in a decade of 200,000 subscribers. Not to mention, they think that these
losses are going to get even worse as we move into the summer. Now, Disney has maintained a
more positive long term outlook projecting that they can still reach 230 million to 260 million
subscribers by September of 2024. But, at this point, to reach this goal, Disney would have
to consistently achieve 11 to 12 million new subscribers every quarter. And the issue is
that Disney has only posted one quarter in the 11-12 milllion range since the end of 2020. So,
many investors are rather skeptical about Disney’s projections prompoting them to leave in droves.
UNDERWHELMING RECOVERY: Alright, so it looks like Disney+
is going take a hit within the next few quarters, but fortunately, as we discussed at the beginning,
Disney is a multi-faceted business that can thrive in a multitude of environments.
If people are going out more, that’s perfect for Disney’s theme parks and their box office numbers
right? Well, the answer is yes and no. Disney has indeed been crushing it in these sectors.
For example, 3 out of the 4 best opening weekends of 2021 belonged to Disney. Similarly,
Disney has been posting tremendous year over year growth as high as 99%
for their parks and experiences. Disney’s revenue is basically back to pre pandemic levels. In fact,
the last quarter of 2021 was their best quarter ever in terms of revenue. The only problem though
is that these impressive revenue figures haven’t translated to their bottom line. Their net income
is only about a fifth of what it used to be pre pandemic. And if we look at their net margin, this
downward trend becomes extremely clear. Over the past few years, Disney’s net margin has plummeted
from over 20% to just 3%. And the main reason for this is skyrocketing operating expenses which can
be traced back to two factors starting with a massive staffing shortage. As you would guess,
Disney laid of tens of thousands of employees when the pandemic rolled around, but they weren’t able
to fill in these vacancies as demand recovered. In fact, Disney’s total employee count has decreased
for 2 years at this point. And given that demand is quickly recovering to pre-pandemic levels,
Disney is having to increase pay substantially to fill vacant positions. This issue is made even
worse given that 25,000 employees are actually suing Disney to pay better. Now, I’m by no means
trying to suggest that this battle is or is not justified. But, regardless of the morality of the
fight, increasing pay is not the best for Disney’s bottom line or Disney stock. Aside from struggling
to find employees, Disney has also been struggling against inflation. By now, I’m sure we’re all
well aware of how bad inflation has gotten and this issue affects Disney just like the rest of
us. They have to pay more for supplies, food, transportation, talent, energy, and so on and
so forth. Fortunately, Disney has great pricing power when it comes to their parks and experiences
meaning that they can increase prices and people will still pay them. But, with that being said,
rising prices across the board is not the best idea and for obvious reasons, Disney wants to
address this issue as strategically as possible. Disney’s CFO announced that they’re looking into
switching suppliers, substituting products, and cutting portion sizes wherever possible to
minimize price increases. Something else to note is that while Disney may have great pricing power
when it comes to their parks and experiences, they don’t have that much pricing power when
it comes to Disney+. You see, people are often ok with splurging on the occasional vacation,
but they’re way more sensitive to price increases in monthly subscriptions. This
price sensitivity has made it extremely difficult for Disney to continue doubling down on streaming
while maintaining a low subscription cost. I do believe that Disney will eventually figure it out,
but in the meantime, restaffing and inflation has destroyed their net margin.
GO WOKE GO BROKE:
Aside from these fundamental issues that are being reflected in Disney’s quarterly reports,
a major factor that is holding back many investors from investing in Disney is their apparent
wokeness. I mean it’s no secret that Disney has always leaned towards a more liberal perspective,
and this has become especially evident within the past couple of years. Their movies and media
promote LGBTQ quite openly as there’s dozens of references sprinkled throughout their films.
This has prompted many parents to reevaluate whether they want their children to be exposed to
such content at such an early age. Now, I’m sure there’s gonna be plenty of comments down below
that say “Go woke go broke”, and honestly this is a pretty accurate statement and I’m not trying to
single out being woke. If Disney was leaning too far to the right, it would be the same argument.
Companies should simply not be involved in politics. The truth is, regardless of which
side you choose or how careful you are with your stances, you’re naturally going to enrage
a significant portion of the population. So, as a company, it’s best to stay out of politics and
hot topics in general and just focus on running your busines well. But unfortunately, Disney is
actively doing the exact opposite. For example, a few months ago, Florida’s Governor, Ron Desantis,
signed a rather controversial law that many call the Don’t Say Gay bill. If you’re not familiar
with this bill, it basically outlaws classroom instruction regarding gender identity between
kindergarten through 3rd grade. Right after this news came out, Disney decided that it was a great
idea to publicly announce that they were not only against this law but that it is there goal as a
company to repeal this legislation. Again, their stance regarding this issue doesn’t really matter.
If they came out in full support of the bill, it would’ve been just as bad for the company
because investors don’t like contreversial companies. From their perspective, controversy
simply threatens future growth, and at this point, Disney has gone pretty far down that road.
FUTURE OUTLOOK:
At the end of the day, Disney definintely does have some internal issues. They’re having to
fight against inflation and staff shortages while also trying to keep prices as low as possible.
They’re also having trouble reaching some of their ambitious growth targets especially with Disney+,
but honestly, I don’t think any of these are a gamechanger for Disney’s overall business.
Afterall, it’s not like Disney+ is doing bad and it’s not like inflation and staffing concerns
are specific to Disney. Personally, I think it’s just a matter of time until
Disney recovers from these short term issues and starts to post solid profits once again.
Something that is a gamechanger, however, is their political entanglement. At this rate, it’s just a
matter of time until investors write off Disney altogether as a company that’s too political to
invest in like Twitter. If you look at Twitter’s revenue, for example, it’s really only gone up.
If we look at twitter stock, however, it hasn’t moved in a decade. And unfortunately, this might
be the path that Disney is going down as well. If we put their political entanglemnet aside though,
Disney is looking quite nice in my opinion. In one of their recent earnings calls, Disney even teased
the idea of a Disney metaverse that is supposed to connect their digital and physical offerings more
than ever before. Now, this was simply a tease and we have no idea how well this plan will work
out or if it’ll even end up happening. But, from an investors perspective, it’s great to see that
Disney is looking to embrace new technology. This shows that the company is still trying to
innovate and that they probably won’t stagnate fundamentally anytime soon. So, personally,
I think Disney is a solid investment at $100 if you’re willing to take on the political risk. But,
that’s just what I think and it’s not financial advice. What do you guys think about Disney’s
wokeness? Comment that down below. Also, drop a like if Disney is nostalgic for you.
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