During this intense sell-off — perhaps the worst I’ve seen in my 20 years in the market — I’ve argued repeatedly that investors need to take the long view. Disney (NYSE:DIS) stock is a perfect example why.
Disney unquestionably is dealing with short-term issues on multiple fronts. 2020 earnings are going to take a hit. There may even be lingering effects into 2021.
But Disney, and the world, will make it through this crisis. And for DIS stock, it’s important to remember that stocks aren’t valued only on their profits this year and next.
Again, take the long view. This is one of the world’s great media companies. It’s one of the world’s great companies, period. Yet DIS stock fell almost 40% in five weeks based on short-term factors.
DIS stock rallied sharply on Tuesday so some investors have seen the opportunity. More will. Disney has its challenges, but under $100, Disney stock is simply too cheap.
The coronavirus crisis is hitting Disney on multiple fronts.
This month, the company closed its theme parks worldwide. Disney cruises have been canceled. The studio business isn’t releasing movies. And the ESPN unit will take a massive ratings hit, as essentially every sports league in the world has paused or ended its season.
These short-term issues are going to cost Disney money. The Parks & Experiences business, which includes the theme park and cruise operations, generated almost $5 billion in operating income in fiscal 2019 (ending Sept. 28). Theatrical releases last fiscal year likely contributed over $1 billion in profit. ESPN is the core driver of a Cable Networks segment that had over $5 billion in earnings in FY2020.
There will be challenges going forward as well. The worldwide shutdown instituted in response to the pandemic may lead to a short-term recession. That could lower demand for theme parks and cruises even once those businesses re-open.In that context, the sharp decline in DIS stock might seem to make some sense. But a closer look at the numbers shows why the sell-off is an overreaction.
The Impact on DIS Stock
Looking just at those three businesses, something like $11 billion in annual profits may take a significant near-term hit. That’s hardly good news.
But even after a 13% bounce in midday trading Tuesday, Disney lost roughly $80 billion in market value just since Feb. 19.
The loss of even $11 billion in profit doesn’t justify that type of decline. And it’s not as if all of those earnings are going away. The core revenue driver in the Cable Networks business isn’t advertising. It’s affiliate fees paid on a per-subscriber basis by operators like Comcast (NASDAQ:CMCSA) and Charter Communications (NASDAQ:CHTR).
Meanwhile, the Disney+ streaming service may get some help as consumers worldwide are stuck at home. Initial subscriber numbers already were spectacular: the service picked up 10 million subscribers on its first day. Rivals AT&T (NYSE:T) and Comcast haven’t hit the market yet.
Disney+ was the key reason why DIS stock soared from $110 to $150 last year. And even then, it’s not as if the stock was expensive. Nor did investors lack concern.
Cord-cutting has been a long-term worry. The parks and cruises rely on some extent to a strong economy.
Investors last year, however, were taking the long view. They saw Disney+, rightfully, as the most legitimate competitor to Netflix (NASDAQ:NFLX). Hulu gives Disney another potential winner in the streaming wars.
That case hasn’t changed.
Nobody knows for sure when the sellers in this market will be exhausted. But investors taking the long view have opportunities to own some of the world’s best companies at cheaper prices. As with DIS stock, in some cases those prices have hit multi-year lows.
Volatility will stay elevated. It will take time for the world to get through this crisis. It will take even longer, perhaps, for cooler heads to prevail in the market.
But when that point comes, the winners will start winning again. Disney is a winner. And below $100, DIS stock is just too cheap.