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Walt Disney Co. may be feeling the “incredibly harmful” impacts of COVID-19 for longer than many people expect, according to one analyst.
MoffettNathanson’s Michael Nathanson downgraded shares of Disney DIS, -3.43% to neutral from buy on Monday, a day before the media giant was scheduled to report March-quarter earnings. Shares were down 3.7% in morning trading.
That Disney faces risks from COVID-19 isn’t a new argument, and the stock has fallen 30% in the past three months amid concerns about nearly every facet of the business, from media networks to parks to movie studios. But Nathanson sees the negative effects of COVID-19 stretching into fiscal 2022 as he writes that Disney could feel an economic impact for “longer than most anticipate,” especially with the possibility of a second wave of infections.
“We believe that investors are underestimating the lagging recovery nature of Disney’s theme parks,” Nathanson wrote.
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Based on his historical analysis, he said that Disney tends to see its revenue troughs late in an economic downturn because consumers often hesitate to book vacations during the worst of a crisis. Of course, there’s no historical reference for an event that forced the closure of all theme parks for months, but Nathanson sees risk that consumers could put off big discretionary purchases like vacations until they feel more certain about the economic climate.
He also sees many question marks as he tries to imagine what the Disney parks will look like once they begin to reopen. The company may only open a few parks and hotels to start and operate with reduced staffing, which could help it cut back on costs in a period of uncertain consumer demand.
The company faces tough strategic choices as it plots its course in film as well. Nathanson said that it’s hard for the company to commit to film advertising given that theaters in many large states still are closed and it’s unclear when people will be eager to revisit theaters even after they formally open their doors.
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Disney pushed back the release of “Mulan” to July from March, and Nathanson isn’t sure whether the company will commit to that new date. On one hand, some customers may be eager for out-of-home experiences especially after a long theatrical drought, but others may remain wary of tight spaces.
“In short, it is hard to estimate how much Mulan will do at the box office, but it is likely to be less than a historical blockbuster if it is released in July,” he wrote. The company could “continue to be aggressive with its post-theatrical windowing strategies” by quickly bringing “Mulan” to Disney+ if the film has a disappointing box-office showing, for example, but that may not be the preferred long-term strategy.
“Despite experimenting with more aggressive windowing strategies, Disney is likely the only studio that consistently makes money in the theatrical window and would prefer to preserve these profits,” Nathanson wrote.
As for Disney’s media networks, Nathanson revised his estimates to incorporate “more significant TV advertising declines” as he worries that the loss of live sports could further strain the video ecosystem “and accelerate subscriber losses for at least the next quarter.”
The Disney+ streaming service is a bright spot, having recently notched 50 million subscribers, but there are some uncertainties for this part of the business as well, in Nathanson’s view.
“We still question whether Disney+ will see elevated levels of churn as some of the earlier U.S. promotions and discounts start to roll off combined with the lack of extensive original content on the service,” he said.
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He lowered his price target on Disney shares to $112 from $120. Disney’s stock is down 30% so far in 2020 as the Dow Jones Industrial Average DJIA, -0.77% is off 18%.
