After a record 2019 where Walt Disney (NYSE: DIS) raked in 33.3% of domestic gross box-office revenue, the media mogul’s momentum was muted because of the COVID-19 pandemic. But Disney hopes to reverse the trend this year with a stacked slate of highly anticipated films and exclusive Disney+ content.
It is off to a great start with the movie Doctor Strange in the Multiverse of Madness and the positive reception of Obi-Wan Kenobi on Disney+. But the company is losing money on its international parks as lockdowns weigh on its bottom line. Moreover, the company is missing out on key box office revenue streams from some of its largest international markets — namely China.
Here’s a look at what Disney has in store for fans this year, as well as how its exposure to international audiences factors into the investment thesis.
What is Disney’s international exposure?
As a vertically-integrated international media conglomerate, it’s no surprise Disney is dependent on the global economy. Disney has six resorts, four of which are located abroad (Paris, Tokyo, Hong Kong, and Shanghai). Disney also has five cruise ships, which attract international travelers. The company’s movies are shown around the world, and Disney+ is a global service.
On its fiscal 2022 second-quarter earnings call, the company announced that Disney+ was expanding to 53 new markets across Europe, Africa, and West Asia. In fact, most subscribers are international. Disney+ subscribers totaled 137.7 million at the end of the most recent quarter, but only 44.4 million of them, or just over 32%, were domestic.
In fiscal 2019, which was Disney’s biggest box-office year in history (not to mention its highest-revenue year in history) it raked in $3.76 billion at the domestic box office and $7.35 billion at the international box office for $11.12 billion in total. That year, about 10% of the media company’s total box office revenue came from China, largely thanks to $614 million of ticket sales from Avengers: Endgame.
Missed opportunities from China
Shanghai Disneyland has remained closed since March 21, even as China eases its COVID-19 lockdowns. Hong Kong Disneyland reopened on April 21. But Shanghai Disneyland and Hong Kong Disneyland were closed for much of the current year. That headwind contributed to a $268 million operating loss for Disney’s international parks and experiences segment in the fiscal second quarter. On the other hand, domestic parks and experiences booked $1.39 billion in operating income, and consumer products generated $638 million in operating income.
According to Box Office Mojo, Doctor Strange in the Multiverse of Madness has collected $912 million in box office revenue worldwide ($391 million domestically and $522 million internationally), an excellent result. But the movie would likely have performed even better if it weren’t for lost revenue from China, Russia, and Ukraine. For example, a similar performing film such as Captain Marvel generated over $150 million in box office revenue alone from China in 2019, so it’s safe to say Doctor Strange lost out on substantial ticket sales in those markets.
Disney can handle its headwinds
Disney is undeniably exposed to international markets — but less so than many investors may think. For example, it has a minority (47%) stake in Shanghai Disneyland. And the domestic park performance was so strong in the latest quarter that the company recorded its highest parks, experiences, and products revenue and operating income for any second quarter in company history — even when factoring in its international losses.
The majority of box-office revenue is international. But again, Disney is used to generating roughly 10% of its box-office sales out of China. Thanks to its diversification, it can absorb a slowdown in many markets without taking too much of a hit.
The bigger concern for Disney is the threat of ongoing inflation and a potential recession in the U.S., in addition to the international headwinds discussed. That one-two punch could result in another slowdown for the business and push it further away from topping its record profit from fiscal 2018.
Disney can’t control the broad economy, but it can lay the groundwork for a strong content slate and make ongoing investments at its parks that boost its brand and set the stage for long-term growth.
Instead of overweighting Disney’s quarterly performance, it’s better to consider the bigger picture of the business the company is building and how streaming integrates nicely into its on-screen and in-person experiences. Shares are down almost 50% from their all-time high, but this is a well-rounded company to consider buying now.
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Daniel Foelber has the following options: long January 2024 $120 calls on Walt Disney, long January 2024 $145 calls on Walt Disney, long January 2024 $155 calls on Walt Disney, long July 2022 $145 calls on Walt Disney, long June 2022 $170 calls on Walt Disney, short January 2024 $125 calls on Walt Disney, short January 2024 $150 calls on Walt Disney, short January 2024 $160 calls on Walt Disney, short July 2022 $150 calls on Walt Disney, and short June 2022 $175 calls on Walt Disney. The Motley Fool has positions in and recommends Walt Disney. The Motley Fool recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.
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