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All media companies face risk due to the COVID-19 pandemic, according to Lightshed Partners analyst Richard Greenfield, but perhaps none more so than Walt Disney Co.
He initiated coverage of the stock with a neutral rating Wednesday, warning that the pandemic threatens to disrupt the entire Disney “flywheel.”
While Disney is seeing some obvious challenges now that it’s had to close theme parks and postpone movie premieres, Greenfield is more worried about what the outbreak means for the way Disney’s various arms all work together.
Fundamentally, he said, Disney’s business relies on movie releases that drum up interest in everything from TV spinoffs to consumer products to theme parks. The fear is that if the movie industry can’t return to normal in the near future, that creates headaches for all those “downstream” revenue sources.
“While it is entirely possible that movie theaters reopen in the fall of 2020, the question becomes what does that mean?” Greenfield asked. “If a 300-seat movie theater does every other row and every other seat for social distancing, its capacity falls to just 78 (down 74%).” He also questioned whether many consumers would be eager to go to a theater even if social-distancing measures are put in place.
Another problem for Disney, in his view, is that it may not want to release big titles in an uncertain market. The company has delayed its “Mulan” release to July, but Greenfield expects that a premiere then would mean a global box office total of below $300 million, “maybe even sub-$100 million to $200 million compared to their hopes of well over $1 billion.”
Then there’s the question of whether Disney will try to bypass the theaters by renting new films directly to consumers right away.
“While we are very excited about the early results from Universal’s Trolls World Tour, which skipped theaters and went direct-to-consumer (should soon be the biggest digital revenue movie in history exceeding Disney’s Avengers), we are talking about a sequel to a $346 million box office film, not a $1 billion to $2 billion blockbuster,” Greenfield wrote. He also doubts whether Disney would undertake such a fundamental shift to its theater business model.
Disney shares closed down 2.5% in Wednesday trading. They’ve fallen 29% so far this year as the Dow Jones Industrial Average, of which Disney is a component, has decreased 18%.
