Disney (NYSE: DIS) shares surged nearly 12% yesterday on news that a COVID-19 vaccine, created by
Pfizer (NYSE: PFE) and
BioNTech (NASDAQ: BNTX), could be close. Even if the vaccine does receive regulatory approval – which is no guarantee – it wouldn’t be widely available until well into 2021. But there’s light at the end of the tunnel.
Disney, which reports its fiscal Q4 earnings on Thursday, is approaching all-time highs after yesterday’s move.
So, why did Disney go up so much yesterday? And is there still an additional upside, post-earnings?
Vaccine Would Be a Boon for Theme Parks
In Disney’s fiscal Q3, its “parks, experiences, and products segment was the most severely affected [by COVID-19] with an adverse impact of $3.5 billion.”
Ouch. With COVID-19 cases peaking, investors were probably pessimistic about any type of recovery in the winter. But I’m betting that there was also a lot of fear about how spring and summer 2021 were going to be.
Disney has actually remained a destination in 2020, in spite of arduous safety requirements, but a full recovery pre-vaccine was always a pipedream.
The real question, however, is: Does this 12% move accurately reflect the impact of the news? I would say that it does; the adverse impact was a big number, and there is likely going to be some pent-up demand for park-goers. So, I think that the move was justified, but don’t really see an opportunity to capitalize on it.
But there is another piece of Disney that I’m really optimistic about – that I don’t believe is being fully accounted for.
Disney+ is Turning into Streaming Powerhouse
Disney+ has fared about as well as anyone could have expected in its first year. Launched in November 2019, the streaming service has over 60 million subscribers at last count. Disney+, like the other streaming companies, benefited in a big way from the pandemic; an average of one in three adults in the US added a streaming service sometime in March.
Is Disney+ tapped out after all this growth? Hardly. Just look at Netflix (NASDAQ: NFLX) for comparison. Netflix has nearly 200 million paid subs and costs almost double Disney’s service – which goes for just $6.99 per month. So, the growth potential – in terms of both additional subscribers and pricing power – is there.
And here are two reasons why Disney can realize that growth potential:
- The company has deep pockets.
A prerequisite to compete with Netflix is having deep pockets. Content is king. And expensive.
In October, activist investor Dan Loeb called on Disney to permanently suspend its $3 billion annual dividend and “redirect this capital entirely into content production and acquisition for Disney’s DTC businesses, centered around Disney+.” Loeb added that a re-allocation could allow Disney to “more than double its Disney+ original content budget.”
Disney could announce plans to permanently suspend its dividend on Thursday. Or it could reinstate it. I don’t pretend to have the answer to that question. But I think that Disney is smart enough to invest heavily in content. Whether the funds come from a permanent dividend suspension or a potential parks segment revival, I expect Disney to figure it out.
- Disney+ is expanding into Latin America.
Disney+ plans to make the service available in Latin America this month, and if Netflix’s experience there is any indication, Latin Americans love streaming. Netflix has 36 million paid subs in Latin America; if Disney+ can acquire even one-third of that amount, it would result in 20% subscriber growth.
Disney+ is currently well behind Netflix when it comes to local language content, but Disney+ will close the gap. And like I said, Disney doesn’t need to overtake Netflix in Latin America to get a nice boost.
Disney+ Makes Disney a Buy Ahead of Earnings
It’s been a heck of a first year for Disney+, but I’m confident that it’s just getting started. The subscriber numbers for fiscal Q4 should be solid, but the outlook should be even better.
With the parks segment set to return to pre-pandemic heights sooner rather than later, look to get into Disney before it really gets rolling.
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