Disney (DIS +0.12%) stock is down 14% in 2021. As the company battles pandemic-fueled disruptions, investors may ponder if Disney's business will ever be the same. Disney has some exciting catalysts going into 2022, and now may be a good time to buy the dip.
1. Theme parks are positioned for a comeback
The COVID-19 pandemic took the world by storm in March 2020. The year 2021 was the first full fiscal year that Disney, which is heavily reliant on its theme parks, was impacted by the pandemic. Despite these headwinds, Disney reported revenue of $5.5 billion in its Parks, Experiences and Products segment for the fiscal quarter ended Oct. 2 which represented 99% year-over-year revenue growth. On top of that, the company improved its operating income, generating $641 million in this segment during the quarter compared to a loss of nearly $1 billion during the same period in the prior year.
These results should not be taken at face value. For the fiscal year ended Oct. 2, Disney reported total revenue of $16.6 billion and operating income of $471 million for Parks, Experiences and Products. This represents a 3% year-over-year decline in revenue, and only a 4% increase in operating income. Considering that quarterly operating income for Parks, Experiences and Products was $641 million, yet annual total operating income was lower at $471 million, it is clear that this segment was operating at a loss earlier in 2021.
The silver lining is that Disney's quarterly results are reflecting increasing demand at its theme parks. Although revenue from theme parks is not operating at pre-COVID levels and is also marginally lower than in 2020, which was not a full year impacted by the pandemic, the sequential quarterly upticks in both revenue and operating profit signal that demand for travel is bouncing back as the company reopens its parks and resorts. Should the omicron variant wane by springtime in 2022, it is reasonable to believe that it will be an even stronger year for Disney's theme parks than 2021. As vaccinations rates increase and pandemic-driven regulations subside, Disney should benefit directly from any increases in travel.
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2. The streaming wars are just getting started
Disney launched its own streaming service, Disney+, in November 2019. Per the company's latest quarterly results, Disney+ has 118.1 million paid subscribers. The company reached 100 million subscribers about 16 months after it launched. For context, it took Netflix nearly a decade to reach that milestone. This rate of growth is encouraging and Disney's management is doubling down.
The company is reportedly increasing its content budget for fiscal 2022 by $8 billion. Some of this increased spending will be dedicated to launching the service in 50 more countries over the next two years, bringing the total geographic footprint to 120 countries. Moreover, Disney already has 340 local originals currently in development, and the company is planning on making more.
If this aggressive expansion wasn't enough to excite investors, Disney CEO Bob Chapek recently discussed another avenue that could serve as a lucrative growth catalyst for Disney and its streaming ambitions: the metaverse.
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3. Don't underestimate the metaverse
Discussions about the metaverse began to heat up following Meta Platforms' rebrand from Facebook in October. Should the metaverse materialize, there will be several obvious beneficiaries such as social media companies and chip suppliers. However, investors should not discount Disney as a potential power-player for this new frontier of the internet.
Disney currently operates a strong footprint in the physical world through its theme parks, as well as the digital world via Disney+. Blending the physical and digital worlds more closely could serve as a gateway for Disney to tell its stories in a more intimate way. During an interview with CNBC, Disney CEO Bob Chapek stated that the company's streaming service will be the core foundation of its metaverse ambitions.
Until now, streaming services have largely served as a way for consumers to view specific content catered to their interests without binding themselves to a larger, more expensive cable plan. Disney not only has the financial horsepower, but the creative strengths and intellectual property to completely redefine the streaming experience.
Now what?
There is little question that Disney has faced an uphill battle since the COVID-19 pandemic began. The company has weathered both domestic and international lockdowns, travel restrictions, and more. Revenue from theme parks is slowly crawling back to pre-pandemic levels. As vaccination rates continue to rise and travel restrictions eventually dwindle, investors should recognize that Disney's revenue from its parks has upside.
The company is continuing to invest in its streaming platform and plans to serve over 100 million countries and add over 300 new titles to its already impressive content library within the next two years. As the metaverse begins to take shape, Disney has multiple levers that it can pull to marry both its physical theme park experiences and its digital content, anchored on Disney+. These developments could serve as major catalysts to increase paid subscribers to its streaming efforts and contribute to its growth in a meaningful way. Investors should be excited and encouraged for the next horizon of the media giant as it evolves into a more malleable tech company.
