Walt Disney (NYSE:DIS) stock has experienced a tumultuous journey in 2023. Indeed, Disney stock has declined by 33% from its February high of $118.18 to its September low of $79.75. These levels have not been consistently observed since 2014.
Despite some positive developments, such as Disney’s multi-year agreement with cable provider Charter Communications (NASDAQ:CHTR), which resolved potential distribution disputes for Disney+, challenges persist. According to a Bloomberg report, Disney may fall short of its 2024 subscriber targets for Disney+. In August 2022, the company projected between 215 million and 245 million Disney+ subscribers by 2024.
As of now, with just 15 months left until December 2024, Disney+ has accumulated 105.7 million subscribers. When factoring in the 40.4 million from Disney+ Hotstar, its Indian streaming service, Disney remains 70 million subscribers away from its 2022 projections.
CEO Bob Iger faces the critical task of prioritizing profitability at Disney over the next year. Any ventures that cannot deliver profits, including Disney+ despite its potential, will be reevaluated.
Given the stock’s current trading levels, value investors may be grappling with the dilemma of whether this presents a historic buying opportunity or a potential value trap.
For those who are undecided about Disney, exploring options could be a prudent approach. Here’s why:
Positive News for Disney’s Theme Parks and Cruise Line
Disney recently announced a substantial $60 billion investment in its theme parks and cruise line over the next decade. This business segment is deemed crucial for Disney’s long-term success as a company and stock. Although the pandemic exposed the vulnerabilities of in-person entertainment, it’s evident that even pandemics have finite durations. People are flocking to Disney’s parks and cruise ships in large numbers.
In the nine months ending on July 1, 2023, Disney’s Parks, Experiences, and Products (DPEP) segment recorded revenues of $24.84 billion, a 17% increase from the previous year, and an operating profit of $7.64 billion, up by 20%. Remarkably, while DPEP contributed only 37% of Disney’s revenue through the third quarter, it generated an impressive 77% of the company’s operating profit.
This strategic investment in what works has paid off handsomely for Disney. The company even has the potential to build seven more Disneylands on its existing land holdings, and it plans to introduce three more cruise ships by fiscal 2025 and 2026.
Disney Stock Reacts to the News
However, as is often the case when a company announces substantial spending plans, investors may react cautiously. Disney’s shares experienced a decline of over 3.5% in early afternoon trading following the announcement.
Nevertheless, Disney’s presentation accompanying the $60 billion spending plan indicates that DPEP revenues are expected to reach $32.3 million in fiscal 2023, up from $23.5 billion in 2017. Additionally, the segment’s operating income is projected to be $9.2 billion, equivalent to 28.5% of revenues, a healthy margin.
One key statistic highlighted during the presentation is that for every guest who visits a Disney theme park, there are 10 Disney enthusiasts (movies, TV, etc.) who have never been. This suggests a substantial untapped market awaiting exploration.
Despite the challenges faced by the streaming sector, Disney Cruise Line‘s profitability is on the rise, with an impressive 23% annual growth in operating income since fiscal 2012. Barring unforeseen circumstances, the future looks promising for DPEP.
Exploring Investment Options
For investors looking ahead to the September 20, 2024 expiration date, options may offer an attractive avenue. The $115 strike call option, with a $2.06 ask price, is a popular choice based on open interest. While it requires Disney stock to appreciate by over 40% in the next year for exercising the right to buy 100 shares to be worthwhile, the delta of 0.2361 suggests a more achievable 11% price increase could double your investment if you decide to exit early.
Conversely, selling the $115 put option yields $32.50 in income, equating to an annualized yield of nearly 40%. However, since it’s currently well in the money, unless the stock experiences a significant surge, you may be obligated to purchase the shares at $115 minus $32.50, resulting in a net purchase price of $82.50—just 39 cents higher than the current share price. The downside is that if the stock declines substantially over the next year, you could face a considerable paper loss on the stock.
Considering these factors, the September 20, 2024 $115 call option appears to be the more favorable choice. The stock’s potential increase in value over the next year will largely depend on Disney’s progress in divesting legacy TV assets and moving Disney+ closer to profitability.
In the complex world of investments, decisions like these are why individuals like Bob Iger earn their substantial compensation.
Featured Image: Unsplash @ Thomas Kelley