After closing all of its parks to stop the spread of the coronavirus, Disney (NYSE: DIS) now it begins to reopen. Its Shanghai park allowed visitors to start visiting again in May, with limited capacity, and tickets sold out in a matter of minutes. In addition, she announced that she will reopen Disney World in Florida on July 11 and Disneyland in California on July 17.
However, Florida reports an increase in COVID-19 cases, and there is a possibility that Disney may decide to postpone the opening of the doors at Disney World. Additionally, unions in Los Angeles report that workers are eager to return to work at Disneyland amid a growing number of cases in Los Angeles and Orange County.
If there is an announcement to delay the reopening of a park, the share price is likely to drop. Let’s take a look at why that would be a buying opportunity for long-term investors looking to buy shares in Disney.
Parks will not be firing on all cylinders for some time
Disney parks are a great asset; In 2019, the segment that includes parks generated 45% of the company’s total operating income. However, the short-term prospects for this segment remain highly uncertain. Given the increase in infections around the Orlando and Los Angeles areas, the market is likely assessing with some probability of a delay in reopening.
If that happens, it won’t have as negative an impact on revenue as the initial close did. This is because the parks will run at a limited capacity level for some time to allow for social distancing. For example, in Shanghai, the park only allows 30% of the total capacity. Loss of revenue from delaying a park expected to reopen to 30% will be 30% to 0%. Much less than the shock of an initial shutdown, when capacity went from 100% to 0%.
Disney has demonstrated pricing power, and can flex this power after COVID. In 2018, the price of a ticket to Disney World was $ 119. That same ticket in 2006 was $ 67. Still, with limited capacity available and accumulated demand, it is likely to continue to increase prices without losing too many customers. .
Streaming is key to Disney’s long-term growth
As of its most recent update, Disney + has 54.5 million subscribers, and Hulu has 32 million subscribers. Furthermore, it is still in the midst of international expansion of services. Disney + launched in Japan in June and is expanding to the Nordic countries, Portugal, Belgium, and Latin America this year.
Meanwhile, Hulu is not yet available anywhere outside the US In the first-quarter conference call, CEO at the time Bob Iger, in response to a question from an analyst, said, “So we don’t have details except we plan to start releasing Hulu. I’d say probably in 2021 internationally after the launch of Disney +. ”
The average Hulu subscriber pays $ 12.06 per month, which is much higher than the average Disney + subscriber, who pays $ 5.63. In contrast, the average Netflix the subscriber pays $ 10.87. To give you an idea of the potential of the market, Netflix has 182 million subscribers worldwide.
In addition, the services allow you to collect large amounts of data about people’s viewing habits. Disney can use this data to optimize its offerings across all its segments, a benefit not available to Netflix.
What does this mean for investors?
An increase in the share of the revenue from your broadcast services can cause your share price to trade at higher price-to-earnings multiples. With a combined approach, the percentage of revenue from services can be allocated to a higher multiple. Conversely, the percentage that comes from your legacy business can continue to operate at its historical average multiple.
An investor who buys the shares when diving into a late-reopening announcement will benefit from a gradual return to normal and a higher share of service revenue over time.