The market continues to witness softness in Disney stock (DIS) - Get Free Report. Investors seemed disappointed in last quarter’s results, particularly regarding the addition of Disney+ subscribers. On the day after the earnings report, share price fell 7%.
At the same time, other investors have remained optimistic about the company. One such example is CNBC’s Jim Cramer, host of Mad Money, who sees reasons to bet on DIS for the long term. Among them are (1) the company's new content investments, (2) the reopening of the parks and (3) the contrarian view in the face of so much negative sentiment.
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One key criticism of Disney’s streaming business model are the high costs. The DTC (direct-to-consumer) approach entails large expenses with the production of exclusive content, which is arguably key in attracting and retaining the platform's subscribers.
But Cramer does not seem to view this as a problem, rather as a long-term investment that the market still misunderstands. Disney and peers like Netflix (NFLX) - Get Free Report spend a large chunk of their operating income on content production, which often scares off investors and sends them to the exits. But after the content is available and it helps to drive new subscriptions, investors return to buy back the shares when the herd chooses to do the same.
Therefore, by focusing on the short term and ignoring the long term, many investors continue to buy high and sell low – a recipe for disaster over time.
With the reopening of Disney's parks, the company’s financial results should start to resemble those of the pre-pandemic period. Therefore, looking only at the new streaming segment is a bit narrow, as it still represents a small slice of Disney’s revenue – although probably the fastest growing over the long haul.
What analysts say
While many investors remain pessimistic about DIS, many investment banks continue to view the company's long-term growth potential as appealing. This is the case of Morgan Stanley, which reiterated its “overweight” rating of Disney:
“We continue to believe its guidance is achievable, that with streaming scale comes substantial earnings power, and that success is not priced in.”
We believe that Disney is still a major player in the so-called streaming wars, and one of the few that can effectively compete for market share with companies like Netflix and Amazon (AMZN) - Get Free Report. Therefore, a smaller-than-expected addition of users in a single quarter, especially at an inflection point in the COVID-19 crisis, should not be extrapolated too far out into the future.
In our view, one must wait for a series of quarterly reports to understand how Disney+ may fare against its peers. Growth concerns should only come, if at all, after careful analysis of the longer-term trend.
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Jim Cramer suggests that selling Disney stock on short-term worries is shortsighted. Yet, DIS continues to tank, and has now headed 11% lower in the past week alone. What do you think?
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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting MavenFlix)