What Are Disney’s Four Major Obstacles?
In the business world, publicly traded companies are only as strong as their perception.
The Walt Disney Company is currently stagnating because Wall Street investors perceive four primary institutional concerns.
As one analyst recently stated, “Separately, these (four concerns) are speed bumps to the stock. Together they’re obstacles.”
Let’s discuss each one and how Disney will probably deal with them.
Predicted Theme Park Slowdown
I’ll start with an odd sidenote. I’m a sports draft superfan, which means I obsess about draft picks each year.
In reading scouting reports, I’m always amused by how the scouts feel the need to say something negative, independent of how big the criticism is.
For example, when Patrick Mahomes II entered the league, people questioned why his college win/loss record wasn’t good.
A college football program includes about 100 players. Even the best quarterback on planet Earth can’t lead 99 bad players to a national title.
Despite this fact, some teams talked themselves out of drafting Mahomes, which allowed a playoff team that year, Kansas City, to trade up and draft him.
Afterward, we got pictures of Mahomes celebrating at Walt Disney World when his team won the Super Bowl. Twice.
That same philosophy applies to Disney, where no sane analyst would question the company’s theme park empire.
Disney has uncovered a secret formula that allows the parks to maintain steady crowd levels throughout the year.
So, guests rarely feel claustrophobic despite the fact that thousands of others are simultaneously visiting the park.
Disney’s brilliant park strategies have led to astounding growth in the theme park division.
The accountants at Disney track the profit margin per customer, and those numbers have increased more than 40 percent since 2019.
Five years ago, I wrote this analysis. At the time, Disney’s Parks division earned a little under $4.8 billion in revenue.
During Disney’s most recent quarter, the Parks division increased to $7.8 million. That’s $3 billion more per quarter in five years!
We’re talking about annual growth of about 12.5 percent from Disney theme parks.
Nobody should worry about that division, but analysts list inflationary concerns anyway.
The Death of Cable Television and Its Impact on ESPN
The other Disney criticisms are a bit more stress-inducing, particularly this one and its ripple effects.
Cable television is dying, folks. If this were a movie, cable television would be lying on a hospital bed with Gen Z family members ready to pull the plug.
The other day, the number one show on network television earned 3.4 million viewers, while the top cable series managed a paltry 1.18 million.
During the same week five years ago, the top network series claimed more than 11 million viewers, with two others in the six million range.
On cable that day, at least 29 (!) programs earned more than 1.18 million viewers.
So, the number one cable show last Thursday would have been lucky to crack the top 30 just five years ago.
Why does that matter? Disney has built its entire media empire around television.
As proof, when I wrote that same earnings report five years ago, Disney’s Media division outearned its Parks division.
In 2018, the Media Networks earned more than $6.1 billion. Disney has since consolidated, which makes an apples-to-apples comparison impossible.
However, that total from 2018 reflects how much Disney stands to lose as cable television erodes even more.
Specifically, Disney has turned ESPN into its own division. Now, the company is prepping to turn ESPN fully digital.
When that happens, an essential pillar of Disney’s revenue foundation could struggle for a time.
From Disney’s perspective, it has signed long-term contracts with several professional sports leagues.
Those deals become albatross-adjacent if ESPN lacks the viewership to monetize the products via advertising and ESPN+ subscriptions.
Speaking of which…
Weaknesses in Disney Streaming Revenue Model
In 2019, Bob Iger revealed Disney+ to the world and proudly announced that the service would turn a profit by 2024.
At the time, everyone on Wall Street happily embraced this proclamation as a strong sign that Iger had a plan and a roadmap.
Alas, five years can seem like an eternity to investors, especially when the financial losses show up on the ledger sheet.
Last year, everyone freaked out when CEO Bob Chapek started calmly discussing those losses during a weird day full of hurricanes and other nonsense.
Disney fired Chapek that weekend and brought back Iger. Since then, the returning CEO’s job has focused on fixing the streaming revenue model.
During Chapek’s final fiscal quarter, the Direct-to-Consumer (DTC) division lost $1.474 billion.
Also, Chapek apparently hid some of the losses by showing them as a part of Media Networks instead.
In just six months, Iger has course-corrected enough that DTC lost “only” $659 million. But that’s still, you know, $659 million in losses.
Wall Street isn’t wrong here. DTC isn’t showing any signs of profitability at the moment.
During recent layoffs and reorganizations, the company streamlined operations and performed some content removal.
In the process, the DTC operations grew more efficient and also earned a tax write-off that will come in handy later.
Still, DTC remains in limbo and probably will for at least another year.
At the moment, the chaos in the industry has led to services like Peacock and Max to underperform.
After a round of consolidation, the entire streaming landscape should clear up, which will help. However, that’s not Disney’s only speed bump here…
Disney Paying for Hulu
This concern directly ties back to the previous one, meaning three of the four “speed bumps” fall into the same bucket.
Disney has converted into a digital company; financing this operation isn’t easy yet since it’s so new.
With the company already losing money, the last thing it needs is more bills.
That’s what will probably happen at the start of 2024, though.
As you probably know, Comcast still owns one-third of Hulu. Disney must pay Comcast at least $9 billion and possibly much more.
The matter remains in arbitration, but Disney previously agreed to a minimum payment that most sources suggest is $9.6 billion or so.
Effectively, Disney must pay another sizable amount for an entity it has already owned and controlled fully since 2019.
The whole thing is weird, but it made perfect sense right up until there was a global pandemic.
Since then, Disney has been cash-strapped relative to expectations, making a large payment for an existing property problematic.
Nobody at Disney sounds concerned, as the company has planned for this financial outlay for a while.
Still, when Wall Street already doesn’t like a company’s financial sheet, the idea of paying $9 billion or more for something it already owns isn’t great.
Notably, when Wall Street analysts discuss Disney, none of these concerns come up often:
- The Florida Feud
- Marvel
- Politics
- Star Wars
- The State of Disney/Pixar Animation.
Wall Street only cares about money. So, if Iger can work one of his world-famous deals here, Disney’s four “speed bumps” wouldn’t matter.
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