After reporting a surprise miss on both sales and profit in their third-quarter earnings report on August 7, shares of Walt Disney Company (NYSE: DIS) stock suffered their largest sell-off in four years. Shares of the entertainment giant dropped over 6%, closing at $132.26. As recently as late July, Disney shares had climbed to a peak high of $146.39.
Lagging attendance led to an earnings miss
The primary reason for the disappointing earnings was the underwhelming launch of Star Wars: Galaxy Edge at the company’s Disneyland resort in Anaheim, CA. On the conference call, after the earnings report was released, CEO Robert Iger issued a surprisingly candid assessment of the lackluster kickoff. Iger suggested the company may have “overthought” the launch of the new attraction and took steps to suppress attendance in anticipation of large crowds – including instituting a reservation system for attractions and raising hotel prices (Iger noted that all hotels in the Anaheim area had increased their prices in advance of the Galaxy Edge opening).
However, the anticipated crowds never materialized. And in a world where social media quickly showed images of light attendance and short lines, it appeared that Disney might be losing its magic touch. Disney World in Orlando, Florida could not help pick up the slack because the company acknowledged, many consumers were waiting for Star Wars land to open there in August before making a trip.
Entering the streaming space is proving costly
Analysts knew that Disney was going to be weighed down by expenses as they absorbed Fox assets and set up their own streaming service, Disney+. This spending resulted in a $553 million loss in Disney’s direct-to-consumer division. The expectation was for Disney theme parks and movies, such as Avengers Endgame (which has generated over $2.76 billion worldwide since its June 26 launch), Toy Story 4, and Aladdin, to help offset these expenses. But, in the end, the reduced theme park attendance coupled with the write-off the company took on the movie “Dark Phoenix” – a Marvel movie the company inherited as part of buying Fox assets, led to the earnings flop.
What to make of Disney stock now?
The question for investors is what to make of this news? I would suggest the answer is, not a whole lot. While analysts were not expecting the earnings miss, they knew this was going to be a transitional quarter for The House of Mouse as they brought the Fox assets in-house and spent capital on their direct-to-consumer products. That said, DIS stock was still up 23.1% for 2019 after the selloff. That easily outpaces the S&P 500 Index which has managed a 15% gain for the year. The blue-chip stock saw a particularly nice jump in June when Morgan Stanley released a bullish forecast for Disney +. Plus, Disney has already made a deal with Comcast that gives Disney full operational control of Hulu right now even though Comcast will not sell its 33 percent stake until 2024.
On the call, Iger announced that Disney would be offering their three streaming services: Disney+, ESPN+, and Hulu as a bundled offering for $12.99 per month which is almost a 30% discount if a consumer were to buy the three services independently. The strategy is clearly a direct, frontal assault on Netflix. Not only is Disney’s bundled package at the same price point as Netflix’s entry-level package, but Netflix will be facing a loss of subscribers as Disney content will leave the Netflix platform and be available exclusively on the Disney+ service.
So with Disney ironing out the kinks of its streaming debut, the question investors have to ask going forward is whether they think Disney will have continued weakness in theme park attendance? Once again, I think the concern is overblown. Disney’s bread and butter will continue to be its theme parks which flourish despite the company raising admission prices every year. Disneyland and Disney World will continue to be destinations for families and Galaxy Edge will almost certainly draw increasing attention as “The Rise of Skywalker” the last in the latest Star Wars trilogy – gets closer to its scheduled release date around Christmas.
A strong stock that should get stronger
Although investors were selling on the bad news, analysts seemed to be unfazed. Of the 24 analysts surveyed by FactSet, 17 maintained their buy rating and the rest maintained a neutral stance. The consensus price target for the stock was raised from $154.62 at the end of July to $155.60. Said Bank of America Merrill Lynch analyst Jessica Reif Ehrlich, “We view both of these items (the higher than expected cost of acquiring Fox assets and weak theme park sales) as temporary setbacks that do not alter the long-term trajectory of the company”.