On the surface, waltz disney ( SAY -0.10% ) the stock stands out as an incredible buy, selling 33% off its 52-week high. But buying a stock just because its price is lower is usually a great way to get into trouble.
When building an investment case, it can be helpful to play devil’s advocate by digging holes in your own arguments. As Charlie Munger famously said, “Invert, always invert. Turn around a situation or problem. Look at it upside down.
So let’s now discuss the bearish and bullish cases on media stocks to see if the Disney stock discount is as attractive as it looks.
The case of the bear
The Bear v. Disney case is compelling and has real red flags that investors should consider. Through this bearish lens, you could argue that Disney+ faces an uphill battle — and not just against other streaming players like netflix ( NFLX 0.92% ), Amazon, Appleand HBO Max, but also the media in general, be it YouTube, video games, TikTok or social networks.
Disney’s investments in Disney+ could be better spent on its parks or movie business — which have high operating margins and a proven track record, and so they’re arguably a better use of capital. And even these companies could face short-term challenges in the form of pricing pressures in an inflationary environment.
In addition, Disney stock does not pay a dividend. And management has shown little to no interest in restoring the dividend anytime soon. Despite a blowout quarter, the company is generating a fraction of the profit it previously made due to high expenses and business still recovering from the pandemic.
Parks could reopen. But Disney+ still needs to achieve long-term profitability for it to be a success. In addition to this underlying uncertainty, it is unclear to what extent the rise in park performance is due to pent-up vacation demand. As the COVID-19 situation improves, Disney needs to show it can continue to grow its park’s performance, such as attracting repeat customers. Destitute vacationers may be willing to accept Disney’s price hikes and the added cost of Genie+ and Lightning Lane. But it remains to be seen if these additional costs will be persistent in the long term.
The case of the bull
The problem with most bearish points is that they are short-term issues. Disney is a powerful global brand and media machine that won’t be going away anytime soon.
Disney Parks have shown impeccable pricing power even in times of inflation. For example, Disney noted that per capita spending at national parks increased 40% in the first quarter of fiscal 2022 compared to the first quarter of fiscal 2019, a sign that customers are ignoring Disney’s price hikes. .
Additionally, Disney+ has a much richer portfolio of legacy content than newer pure-play streaming services. The value of Disney’s blockbuster movies doesn’t end at the box office, but rather has a longer lifespan as they can be added to Disney+, generate revenue from merchandise, and even inspire rides and theme park attractions. Unlike other streaming providers who desperately have to spend more money on content to entertain subscribers to justify price hikes, Disney has a much more efficient and sustainable business model.
Disney+ is worth investing in as it could provide the first touchpoints for lifetime Disney customers. The life cycle of a Disney customer tends to start during the childhood of someone who grew up with Disney, maybe went to the parks or played with the toys, watched the movies, and then passed that joy on. to his children. Disney+ is home to decades of high-quality content and home to new content that adds value to the worlds in which Disney characters live. Therefore, Disney+ fits seamlessly into Disney’s overall content portfolio and could very well drive engagement across its parks and movies over time as consumers become more engaged with various Disney universes like star wars and Wonder.
Where to go from here
Stock prices go up and down because investors have different ideas about the value of a company. Yet most of the short-term price movement can be very far removed from the long-term investment thesis.
When I look at Disney’s business today and its trajectory compared to Disney’s business three or five years ago, I see a business that is only getting better. I see a company with a much more sustainable and diverse business model than, say, Netflix. I see a company that develops characters, creates memories, and provides so many different on-screen and off-screen entertainment possibilities. These green flags far outweigh the short-term red flags regarding Disney’s declining earnings and no dividend.
But I also understand that some investors may prefer to wait a while to make sure Disney+ is everything Disney hopes it will become before hitting the buy button.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.