Disney shares are up after the recent earnings report, based on the idea that Disney lost less money than they should have. For those of you thinking Disney is out of the woods, think again after you read this article.
After looking at the way the stocks jumped based on Disney’s report, you’d think that is all is looking sunny with the company that recently kicked Zip-a-doo-dah to the curb as an irrelevant, non-inclusive piece of music. Well, you’d be wrong. Let’s start with the knowledge that we now have Disney’s burn rate for Q4, and thus, the burn rate for the next quarter. The reason we know the burn rate, more or less, for the next quarter, is because literally nothing is going to change. Disneyland isn’t reopening, cruise lines aren’t moving, Disney World is locked at 35% capacity, and theaters aren’t selling tickets to movies anytime soon.
So what is Disney’s burn rate? Well, for Q4 represented a 710 million dollar punch to the gut. And that means the next quarter is likely at least a 600 million wallop following again. When you add this to the amount of debt Disney took on in the past year, you get the idea that a billion dollar loss over six months should have investors nervous. But they’re not. Why?
First, you need to understand that the stock market is forward looking. And currently, the market believes that Disney can move their 70,000,000+ Disney+ subscribers into paying more for the service down the road for a highly profitable cash-cow. How much more? Consider that currently Disney is making slightly north of $4.00 a month off of Disney+ subscribers on average. You might think, “well surely it’s not that low,” but you have to remember that a huge chunk of those subscribers are getting the service for free through promotions that Disney used to inflate the base.
The question now becomes, can Disney raise the subscription fee to something profitable (Disney+ is currently losing money). That would be a much easier question in a normal world, but in the crazy reality we’re all currently living, Disney is unable to significantly pump up the content releases. Without new content, it’s a hard sell to start cranking up the price. But at some point, Disney will have to do so, and they’ll need much more new content to get their subscribers paying that $12-$25 fee that would make this whole thing worth it. Right now, they’ve got The Mandalorian and WandaVision. One of those is successful, the other is unknown. But Disney will need way more than that to justify a price increase without losing subscribers.
One rumor I’m hearing quite a bit is that Disney may look at doing a two-tier system for Disney+ in which subscribers could pay a premium to gain access to live streaming content (perhaps Disney Channel, perhaps ABC, etc), as well as access to big movies that would go to theaters in the pre-pandemic world. I’m not sure if that’s going to happen, but it’s a possibility for Disney given that they’re stuck a bit on raising the price for everyone at a time when they need to grow subscribers for the purposes of stock evaluation.
Meanwhile at the parks, we know now that Disney has no expectation of Disneyland reopening before Februrary 2021, and potentially not until the summer. We also are fairly in the dark as to what the heck is going on in their Asian parks, while Disneyland Paris is closed indefinitely with no chance of reopening for months. The cruises are all shut down, and that leaves Walt Disney World. Now WDW is normally the crown jewel that keeps gushing money into the company, but at 35% capacity (and even with almost all the non-attraction joys removed), the resort is just barely bringing in a profit… essentially enough to be able to say it’s not losing money. In order to get to healthy place, Disney will need to get that resort running at 50% capacity minimum, but who knows how long that will take. If Veteran’s Day is a bellwether, the prognostications about a maxed out holiday season are looking less likely.
So where does that leave Disney as a company?
Currently, Disney has about 19 billion designated as Cash on Hand. Much of that is derived from loans and will have to be paid back with interest. What we see from the past quarters and the quarter we’re heading into is that Disney likely has a quarterly burn rate of about $600-$700 million until the COVID-19 pandemic ends effectively. That means the company is likely to take losses of about 3 billion dollars in real negative impact over the course of the full pandemic should it last into the summer.
For now, that’s enough to give investors hope and belief that Disney will weather the storm. That’s fully based on the idea that Disney+ will keep the company afloat. It’s a huge gamble, however, as it may be years before Disney Parks are anywhere close to the old normal. And movie theaters may actually never return. How will Disney return to their old cinematic form if Marvel movies can no longer follow the old formula? What does Disney do if COVID has a high mutation rate and cruise lines are essentially down for half a decade?
All of this is unknown in the present. But one thing we do know is Disney will shed about 2 billion a year until things change. That’s with their operations running at bare bones so as not to incur any more losses. That’s with tens of thousands fired. Let’s all hope that this worldwide pandemic ends before summer 2021, but know that Disney is likely to ride this out for years if the situation is prolonged.