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Income, Investing, Stocks, Trading  | May 29, 2019

Over the past six weeks, Disney (NYSE:DIS) stock has rewarded shareholders well. On Apr. 11, prior to Disney’s  investor day presentation, Disney stock price closed at $116.60. The next morning, DIS stock gapped up to open at $127.91. Finally, on Apr. 29, DIS stock reached an all-time high of $142.37. Year-to-date, Disney stock is up 22%.

I believe that Disney stock belongs in a diversified long-term portfolio, as the company has an extremely strong global entertainment brand and exciting growth prospects in streaming media.

However, it may now be time for investors to take some of their healthy paper profits in DIS stock. And if you are not already long Disney stock, you may be better off waiting on the sidelines, possibly until the company’s  next earnings report in early August. But in the next several weeks, I expect DIS stock to be   volatile and Disney stock price to decline. Here are the most important things that investors should know about DIS and Disney stock.

DIS Stock Has Robust Revenue Streams

There are several catalysts that may help Disney stock price reach new highs in the coming quarters. One of them is its diversified revenue streams, spanning across multiple geographies. The conglomerate also enjoys tremendous brand recognition globally.

Four segments generate most of Disney’s revenue:

  • Media networks (such as ABC and ESPN),
  • Parks and Resorts (such as Disneyland and cruise lines),
  • Studio Entertainment (including Lucasfilm, and Marvel),
  • Consumer Products & Interactive Media (including Disney Store, and ESPN+)

On May 8, the company reported earnings for its second fiscal quarter. It logged revenues of $14.9 billion on earnings per share of $1.61 and beat analysts’ estimates on both the top and bottom line.

Results from its  operating segments varied. CEO Bob Iger highlighted higher affiliate revenues from ESPN as well as the popularity of its domestic theme parks. DIS also said that it  would be repositioning itself towards direct-to-consumer  services.

2019 Is an Exciting Year for Disney

For all four segments, there have been many positive developments this year.

This year’s movie list for Disney is quite impressive. In April, Disney stock price hit an all-time high when the company said that the opening of Avengers shattered box office records.

Disney’s theme parks are enjoying increasing attendance rates and higher guest spending, leading to double-digit revenue growth. And analysts are expecting another stellar year for the parks.

The company’s new streaming service, Disney+, will launch on Nov. 12 and will include original movies and TV shows from Disney’s brands, including Marvel and Pixar. Analysts expect Netflix (NASDAQ:NFLX) to be adversely affected by the launch, as DIS is removing its movies from Netflix.

Disney’s ESPN+ platform, the DTC sports entertainment video service, currently has over 2 million subscribers. And the company expects that total to reach 12 million by 2024.

In Mar. 2019, Bob Iger also finalized the acquisition of some of Twenty-First Century Fox’s (NASDAQ:FOX, NASDAQ:FOXA) assets. The deal has given Disney access to Fox’s popular film production businesses, including 20th Century Fox, Fox Searchlight Pictures, and Fox 2000, as well as Fox’s television businesses.

Bob Iger  has been upbeat about the positive effects of Fox’s popular franchises and branded content on Disney’s ecosystem. After this acquisition, Disney controls Hulu, another streaming-media company. Hulu is expected to have mostly adult content as opposed to Disney+, which will focus on kids and will not even feature any R-rated movies.

In other words, as of 2020, DIS will be able to stream the combined content library of Disney and Fox over three platforms,: Disney+, ESPN+ and Hulu.

How Will DIS Stock Hold Up During an Economic Downturn?

InvestorPlace columnist Josh Enomoto has analyzed how a prolonged trade war between the U.S. and China could adversely affect Disney stock price.

Disney stock is a cyclical stock . Prices of cyclical stocks tend to follow the business cycle.

And during prolonged economic downturns, cyclical stocks suffer. Let’s briefly remember how the economic downturn of a decade ago affected DIS stock.

In July 2009, Disney’s quarterly profits fell 26% as the company said it was “hurt by soft advertising sales at ABC and ESPN and dropping consumer spending at Disney World… The company also continued to suffer from a creative slump at its film studio.”

During downturns, many businesses tend to cut their ad budgets. Because Disney depends on advertising dollars, during an economic contraction, maintaining positive revenue, strong margins, and earnings growth might become difficult for DIS. Over time, share prices and earnings expectations tend to move in tandem.

Hollywood is already nervous about how an upcoming recession may affect its results. Given that DIS is a conglomerate that makes and distributes movies, will Disney and Disney stock be immune to an economic decline?

If a recession hits the domestic economy, then Disney stock is likely to be adversely affected again.

Short-Term Technical Charts Give a Mixed Picture

Since reaching  its 52-week high of $142.37, Disney stock has given back some of its gains, mirroring the stock market’s weakness since May 6.

Now that earnings season is behind us, many stocks tend to trade based on  daily news headlines, especially the U.S.-China trade war. In other words, if other cyclical stocks or the stock market declines, Disney stock price may also fall.

Between now and Disney’s next earnings report in early August, I expect Disney stock price to fall below $120 and  possibly move towards $110, where Disney stock has major support. Then DIS may trade sideways between $110 and $120.

It’s almost impossible to time a top and a bottom in the markets. However, the technical charts do not yet forecast another big spike in Disney stock price.

The Bottom Line on Disney  Stock

Within the past decade, the entertainment marketplace has been changing, as we have witnessed the impressive growth of streaming and mobile video. Disney has been adding to its  entertainment empire, and I regard DIS stock as one of the key media and entertainment names to buy for value and future growth. However, the rest of May and June may bring further volatility to the stock market ,and I am expecting Disney stock to be hurt by further short-term profit taking.

Long-term investors may want to use further price declines, especially around the $110- $115 level, as opportunities to buy DIS stock. Those who buy Disney stock will also benefit from its dividend, which provides a yield of 1.3%. In three to four years, patient shareholders are likely to be rewarded handsomely by DIS stock.

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