Disney's Short-Term Hurdles Creates Long-Term Opportunity

Disney DIS has been trading on a high from its new direct-to-consumer streaming platform Disney+ since it was announced last April. Now the stock is down to its lowest price since the announcement due to corona concerns and its abrupt change in leadership on Tuesday evening (February 25th), which has left investors uneasy.

Leadership Change

Bob Iger, Disney’s CEO for the last 15 years, had previously planned to step down from the helm when his contract was up in 2021, but decide that now was as good a time as any to hand over the reins to Bob Chapek, who appears to be the perfect man for the job. Iger had led the company through two of its most significant transitions of this century: The acquisition of 21st Century Fox and the launch of Disney+, which is expected to be the future of this enterprise.

According to the Disney’s press release, “Robert A. Iger assumes the role of Executive Chairman and will direct the Company’s creative endeavors, while leading the Board and providing the full benefit of his experience, leadership and guidance to ensure a smooth and successful transition through the end of his contract on Dec. 31, 2021.”

Bob Chapek has been with Disney for the past 27 years and has been in a leadership position in a wide variety of different segments, getting exposure to the whole business. Below is an excerpt from last night’s press release that highlights Chapek’s background before being Chairman of Disney Parks, Experiences, and Products.

“From 2011 to 2015, Mr. Chapek was President of the former Disney Consumer Products segment, where he drove the technology-led transformation of the Company’s consumer products, retail and publishing operations. Prior to that, he served as President of Distribution for The Walt Disney Studios and was responsible for overseeing the Studios’ overall content distribution strategy across multiple platforms including theatrical exhibition, home entertainment, pay TV, digital entertainment and new media. He also served as President of Walt Disney Studios Home Entertainment, where he spearheaded the successful “vault strategy” for the Company’s iconic films and transformed the primary format of home entertainment from DVD to Blu-ray.”

The Opportunity

The coronavirus has been a big drag on Disney’s Parks and Experiences with theme parks in Hong Kong and Shanghai being closed since the end of January. If the virus continues to spread, Disney will likely have to close down more parks and suspend its cruise liners. Parks, Experiences, and Products make up 35% of Disney’s revenue and 58% of its operating income.

There could be a significant decline in profitability from this substantial income contributor, but this should only be a short-term issue. Its full impact will only be realized once the coronavirus has run its course, which has no timeline, something that is weighing on investors’ minds. The newly named CEO, Bob Chapek, who had been heading the compromised business segment for 5 years, is the man we want at the helm to weather the corona crisis.

Disney is a stock that I currently own, and I’m planning on doubling down. I don’t know how much more the markets will allow DIS to slide before they start buying this stock up (at a discount, let me add). I don’t believe the coronavirus will have a lasting impact on Disney’s profitability beyond the short-term, and as a long-term investor, I like these shares’ at their current price. I will like even more as if it continues to fall

Disney+ is the biggest catalyst for a buy on this falling stock. This newly-released direct-to-consumer business has an enormous amount of potential, and the hyper-fast traction it gained in its first couple months illustrates the gravity of its potential.

This streaming platform had 10 million subscribers within the first 24 hours of its release on November 12th, and within the first month & a half, the number of subscribers had climbed to 26.5 million. Something its competitor Netflix NFLX took over 5 years to achieve. Granted, Netflix pioneered this space, and it took some time for this new segment to gain traction. Now, this lucrative market has created opportunities for media conglomerates with massive content libraries to penetrate and gain share.

Netflix has seen its domestic subscription growth level off in recent quarters and I believe this trend is going to continue domestically and internationally as Disney+ progressively expands its market share. Disney is an internationally known brand with global blockbuster hits. When international consumers are deciding between a streaming service with familiar titles and a cheaper price point, Disney+ seems like a no brainer. Disney just needs to continue producing quality content for its platform, such as the critically acclaimed series, The Mandalorian.

Take Away

Disney+ still has a long way to go before it becomes a significant profit driver for the business, but it is on the right track. I think that the change in leadership came at a good time, keeping creative control with Iger and letting Chapek handle the operational issues with Disney’s Parks and Experiences, where both of these esteemed leaders fit best in the company’s hierarchy.

The full impact of the coronavirus is yet to be seen, but I am quite confident that the issues will stay short-term and that DIS’s long-term potential remains. The further this stock falls, the more shares I am going to buy.

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