Walt Disney (NYSE:DIS) has taken investors on a roller-coaster ride in 2023, with its stock plummeting from a February high of $118.18 to a low of $79.75 in September, marking a 33% decline. These levels haven’t been seen consistently since 2014, and the company’s fortunes seem to oscillate between good and bad news.
On the positive side, Disney recently inked a multi-year deal with cable giant Charter Communications (CHTR), averting a potentially costly dispute over distribution rights for Disney+. However, a Bloomberg report suggests that Disney may fall short of its 2024 subscriber targets for Disney+. In August 2022, the company projected 215 million to 245 million Disney+ subscribers by 2024. As of now, with 15 months remaining until December 2024, Disney+ has 105.7 million subscribers, and when combined with 40.4 million from Disney+ Hotstar in India, it’s still 70 million shy of its 2022 projections.
CEO Bob Iger faces the task of steering Disney toward profitability over the next year, prioritizing ventures that can deliver profits, including Disney+, which holds massive “potential” profits. As Disney’s stock trades at levels unseen in nearly a decade, value investors grapple with the question of whether this is a historic buying opportunity or a value trap of monumental proportions.
For those who remain undecided about Disney, options present an attractive means of gaining exposure without significant upfront costs. Here’s why:
The Bright Side: Disney’s Theme Parks and Cruise Line Investment
Disney recently announced a $60 billion investment in its theme parks and cruise line over the next decade. This business segment is crucial to Disney’s long-term success, despite the pandemic’s adverse impact on in-person entertainment. As the past year has shown, even pandemics have expiration dates, and people are flocking to Disney’s parks and cruise ships in record numbers.
In the nine months ending July 1, 2023, the Disney Parks, Experiences, and Products (DPEP) segment generated $24.84 billion in revenues, a 17% increase from the previous year, with an operating profit of $7.64 billion, up 20%. Although DPEP accounted for just 37% of Disney’s revenue through the third quarter, it contributed a substantial 77% to Disney’s operating profit.
Iger’s strategic investments in this winning segment are paying off, with Disney hinting at having sufficient land for seven more Disneylands at its sites and plans to add three more cruise ships in fiscal 2025 and 2026. DPEP remains a winning hand for Disney.
Disney’s Stock Reaction to the News
Despite the positive outlook for DPEP, Disney’s stock dipped over 3.5% following the announcement of its $60 billion spending plan. However, Disney’s presentation accompanying the plan outlined impressive financial projections. DPEP revenues are expected to reach $32.3 billion in fiscal 2023, up from $23.5 billion in 2017, with an operating income of $9.2 billion, representing 28.5% of revenues.
A notable statistic shared during the presentation was that for every guest visiting a Disney theme park, there are 10 Disney fans who’ve never been—indicating a substantial untapped market.
While streaming may face challenges in the coming years, DPEP appears to be on a smooth sailing course, barring unforeseen disruptions.
Exploring Options
For those considering Disney, especially for the September 20, 2024 expiry, options offer an intriguing alternative. The $115 strike call option, with a $2.06 ask price, is a popular choice. However, it requires Disney’s stock to appreciate by more than 40% over the next year for exercising the right to buy 100 shares to make sense.
Considering a delta of 0.2361, DIS only needs to appreciate by 11% over the next year to double your money on the call if you decide to exit early.
On the flip side, selling the $115 put option yields $32.50 in income, providing an annualized yield of nearly 40%. However, it’s currently deep in the money, meaning you may have to buy shares at $115 minus $32.50, translating to a net price of $82.50—just 39 cents higher than the current share price. The drawback is that if Disney’s stock falls significantly in the next year, you could face a substantial paper loss.
Considering these factors, the September 20, 2024 $115 call option appears to be the more favorable choice. The question remains as to how much Disney’s stock will appreciate, hinging on its progress in selling legacy TV assets and moving Disney+ closer to profitability.
In the world of investing, sometimes the big decisions come with big uncertainties. That’s why they pay Bob Iger the big bucks.
Featured Image: Unsplash @ Thomas Kelley
