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  • Writer's pictureIshfaaq Peerally

Disney's 2Q Earnings. What to look for?

The Walt Disney Company $DIS releases earnings today, Tuesday 5th of May, after the market closes. Let's see what is expected and what should we be looking for. This is the the first earnings report to be presented by new CEO Bob Chapek after Bob Iger retired and assumed the position of Executive Chairman. As Executive Chairman, Bob Iger will be more responsible of the creative part of the business and this is something very important for Disney in the current situation as their parks and cruises are no longer working.

In 2019, the parks accounted for 38% of revenues and 46% of operating income. We don't know for how long these parks will be closed and even when they reopen, revenues will be lower as people are not likely to visit the parks during a health and financial crisis. Another segment of Disney affected is the Studio Entertainment with cinemas closed and the production of movies themselves affected. This segment was 16% of total revenues last year. ESPN is also affected with all major sport events cancelled. More than half of the business of Disney would be severely impacted by this pandemic and recession. Therefore, Disney has to rely on its other revenue segments, namely, the growing Disney+. Disney + now has over 50 million subscribers and it only started six months ago. That's a massive growth. The Global Lockdown only accelerated the growth. The problem is that Disney + may not be that profitable to Disney for the time being at $6.99 per account. Netflix has been increasing their subscription price over the past years in order not to lose money. Disney, on the other hand, could afford to lose money as they were making money in other segments. But this is no longer the case. The real strength of Disney is content. They made some great acquisitions over the years including 21st Century Fox last year and now that they have control of Hulu, they can bundle it with Disney + and ESPN + to sell to consumers. Overall, we should expect this quarter and the year itself to be bad for Disney. Disney + alone won't be enough to make Disney profitable this year. But it will be important for us to monitor the growth of Disney +. But because of the content, for the long-term, Disney remains a very strong company. I wouldn't buy now. The uncertainties are too big to make a good enough analysis of future cash flows. But I am following the company very closely.

I would, however, choose Disney over Netflix at any time. It doesn't make any sense that Netflix is now bigger than Disney.

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