Disney (NYSE:) stock has an extremely strong global entertainment brand and exciting growth prospects in streaming media. The House of Mouse has shown robust performance in 2019, and year-to-date, DIS stock is up about 24%.
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However, August has not been a good month for Disney shareholders so far. And there will likely be further volatility and some profit-taking in the coming weeks. Therefore investors on the sidelines if they do not currently have any positions open in Disney stock.
Alternatively, if they already own Disney, investors may either consider taking some money off the table or hedging their positions. As for hedging strategies, covered calls or put spreads with Sep. 20 or Oct. 18 expiry could be appropriate. Any short-term decline in DIS stock may offer a better entry point for long-term investors.
Disney Stock’s Q3 Earnings
On Aug. 6, Disney stock reported for the third quarter of fiscal 2019. It logged revenues of $20.25 billion on earnings per share of $1.25. However, DIS stock missed on both revenue and net income.
Disney blamed the Q3 earnings miss on the current integration of Fox Corporation’s entertainment assets, which it had acquired earlier in the year for $71 billion.
Four segments contribute to Disney’s revenue:
- Parks, Experiences and Products (such as Disneyland and cruise lines; about 30% of revenue)
- Direct-to-Consumer & International (including streaming services and advertising; about 18% of revenue)
Results from Disney’s operating segments varied. Media Networks unit reported revenue of $6.7 billion, showing a 21% year-over-year increase.
Parks, Experiences and Products’s revenue came at $6.6 billion during the quarter, with a 7% rise from Q3 2018. Nonetheless, analysts were concerned that there was lower attendance at Disney parks overall.
Studio Entertainment segment reported revenue of $3.8 billion, a 33% increase from the same period one year ago. But this isn’t a surprise. Most of our readers will be familiar with the fact that a number of have done extremely well in 2019.
Direct-to-Consumer & International segment saw revenue of $3.86 billion during the quarter. However, its operating losses increased to $553 million from $168 million. The company blamed the losses on increased investments in ESPN+, Disney+ and Hulu streaming services.
In August, Wall Street wanted to see whether the group’s diversified revenue streams would remain robust for the second half of 2019. However, the quarterly report raised eyebrows and the stock price since then has been reflecting investors’ worries.
Content Development Will Be Expensive for DIS Stock
Disney’s third-quarter results highlighted an important headwind that the company is facing in the rest of the year, i.e., increased costs.
During the conference call, Disney management said that direct-to-consumer losses are likely to rise to $900 million in the fiscal Q4. The group will continues to invest in content for Disney+ as well as ESPN+ and Hulu.
Disney+ will launch in November and feature content from various sources, including Disney, Pixar, Marvel, Star Wars. In the U.S., the service, which is likely to appeal to a wide range of viewers, will cost $6.99 a month or $69.99 a year. And the global launch of Disney+ will start in early 2020.
Disney will offer U.S. consumers a bundle of Disney+, ESPN+ and an ad-supported Hulu subscription for $12.99 per month. Incidentally, that would be the same cost as Netflix’s (NASDAQ:) standard subscription plan.
Hulu will have have mostly adult content as opposed to Disney+, which will focus on kids and will not feature any R-rated movies. The bundle will launch alongside Disney+ on Nov 12. CEO Bob Iger said that Disney+ is not likely to have as much content as Netflix, which may become an important concern for investors, especially in the short run.
All of these exciting developments in the streaming space have begun to real money. Disney management has to ensure that the technical backbone of the streaming services works well. It also has to create content to keep the subscribers happy.
Another way to think about the cost of producing original content is that until now, Disney was making money selling content to Netflix. Now it may have to spend serious cash every year to develop content. Of course, the list of for DIS stock includes Amazon (NASDAQ:), Apple (NASDAQ:), and AT&T (NYSE:), too.
Many analysts are also wondering if the streaming space needs . Could there also be a price war around the corner that could benefit the U.S. consumer, but not necessarily the stock price of Disney or of its competitors?
Where Disney Stock Price is Now
Over the past year, Disney stock price is up about 20%. Prior to 2019, between late 2015 and late 2018, DIS stock had not done much for shareholders as it hovered around the $100 per share level.
Let us briefly remember how the stock has traded since early April: On Apr 11, prior to Disney’s investor day presentation, the share price closed at $116.60. The next morning, DIS stock gapped up to open at $127.91. Then, on April 29, DIS stock reached what was then an all-time high of $142.37.
In early May, Disney stock gave back some of its April gains, mirroring the stock market’s volatility. On May 31, the stock saw $130.78. June and July were once again good to shareholders, as the stock reached an all-time high of $147.15 on July 29. Since then, investors have been taking money off the table and Disney stock is hovering around $135.
As a result of the recent declines, the technical outlook of Disney stock has been damaged. Its short-term chart still looks weak, and DIS share price looks poised to exhibit even further volatility in the near-term.
Despite this recent fall in the price of Disney shares, there might still be further declines. In the next several weeks, I expect DIS stock to be choppy and its price to decline below the $130 level, possibly toward $120.
The Bottom Line on DIS stock
So what should investors think about Disney shares right now? The acquisition costs and the direct-to-consumer costs have been considerable. Yet Disney management is at this point ready to rack up losses in the streaming space. They are of course hoping to collect sizeable recurring revenue from subscribers both in the U.S. and worldwide.
Therefore, investors will have to keep an eye on Disney’s costs as well as other fundamental metrics in the coming months to see if the long-term prospects are still in place. Several bearish trends have recently been emerging in DIS stock. I’d say hold off investing in Disney shares until we have more data in the coming months. There might be a few more bumpy quarters ahead of us.
At the time of writing, the author did not hold a position in any of the aforementioned securities.
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