Disney: Turnaround Will Likely Be Harder Than Expected
Contributor since 2021 / 2552 Followers
Summary:
- Disney’s recent releases, including “Elemental” and “The Little Mermaid,” have failed to captivate global audiences, leading to disappointing box office results.
- The company’s shift towards more progressive content may not be resonating with international audiences, potentially affecting the growth potential of Disney.
- Disney’s current cost-cutting measures are not addressing the fundamental issue of producing globally appealing content, making the company a risky investment.
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Introduction
Disney (NYSE:DIS) was once a ‘content king’ with grand ambitions and arguably great potential. On the other hand, I am not sure if the title ‘content king’ is appropriate for the company today.
In my previous article, I pointed out that Disney may have a fundamental problem as the company’s last popular franchises such as Marvel and Star Wars are getting harder for the general public to enjoy as entry barrier is created throughout the expansion of the series. It is getting harder and harder to follow the new release without knowing the basics of what happened in the previous movies or series in Disney Plus. I pointed out that this could be seen in recent box office disappointment in the Ant-Man and the Wasp: Quantumania. Then, another reason for my argument was that Disney’s past success was reliant on sporadic quality movie releases. Popular Marvel movies or Pixar films did not come out every month, let alone every week. But, in today’s streaming age, users expect content to be updated ever so often putting a strain on the company’s existing success formula and franchises.
I continue to believe these reasons are a fundamental problem for Disney. Unfortunately, after accessing the result of more Disney films, Elemental, The Little Mermaid, and Indiana Johns and The Dial of Destiny, I believe the company may be facing further risks. The progressive direction the company is pursuing, whether it is correct or not, may not be in the company’s best interest, especially in the international markets. Thus, the fundamental potential risks to the company are not just limited to the company adapting to the new streaming age or dealing with its franchises becoming a niche market but also in the direction of the company resulting in my continuation of the sell rating.
Past Disney Movies
Since my previous article, Disney released Elemental, The Little Mermaid, and Indiana Johns and The Dial of Destiny, and these titles failed to capture global audiences. Elemental, a Pixar film, so far has reported poor results. At the time of writing, June 6th, the movie grossed about $195 million at the global box office. Considering that the movie had an estimated budget of $200 million, the results are disappointing, especially as the $200 million does not include the marketing costs. Movies share box office revenues with its distributors like theaters, so the film must exceed the budget and marketing by a high margin to break even. Thus, it is highly questionable if the film will be profitable, let alone break even. This disappointment directly follows Pixar’s previous film, Lightyear, which cost Disney over $100 million.
Pixar used to be a producer of highly successful films with multiple movies that grossed over $1 billion at the box office. However, all the success of the company happened before the pandemic. Looking at the success of Super Mario Bros, which was released in 2023, it is likely hard to blame the failure on the market condition. Then, what is it?
The first reason may be an impact from Disney Plus. Some consumers may ask themselves a question. Is it really worth it to go watch a movie when I can wait for it to come to Disney Plus? Unless one is a fan of the film, or theater, or just enjoys a night out, many consumers may simply wait. This has likely taken effect throughout the pandemic creating a fundamental shift in the market. Unless it is a truly popular film, succeeding in the current film environment may be challenging. An example of this case may be Indiana Jones, a popular franchise. The movie was not spared from a difficult environment. The movie only scored about $130 million in its opening weekend. The movie had a budget of $295 million before marketing expenses. Even when speaking conservatively, the movie will likely need to exceed $600-700 to break even creating another detrimental loss for Disney.
Furthermore, in my opinion, another problem may be the direction of Pixar and Disney. I do not know if more progressive contents are right or wrong and I am certainly not in a position to tell anyone whether it is right or wrong, but it seems as if global audiences are not ready to embrace these changes. For example, Lightyear was banned in over 14 countries in the Middle East and Asia regions for same-sex content. China requested that Disney cut out the same-sex kiss scene, which was declined by Disney. As such, progressive content for more conservative global audiences likely left negative impressions of the movie and Disney as a whole even affecting some films that have nothing to do with more progressive content. This can be seen with the rating terror believed to be motivated by racial reasons in The Little Mermaid in East Asian countries leading to the results in many important Asian countries including South Korea, Japan, and China to be lackluster. These and a few other regions around the world have argued that Ariel in the original book was Danish and therefore white. Disregarding whether these countries were right or wrong, the result is clear; many people around the world are not ready or unwilling to embrace changes, which has likely been hurting Disney. After all, if there are controversies and scandals throughout the internet surrounding the company or a film, fewer parents with younger children or even teenage and adult consumers may shy away from the film.
These results are likely crucial. The weakening content performance will not only affect individual films, the results may be detrimental to Disney Plus as well in the long term. A stream of successful and popular films within the Disney ecosystem of contents fuel appeal for Disney Plus. If these appeals start to fade for global audiences, the growth potential of the service may start to get limited.
Overall, Disney’s struggle to produce a truly successful film is creating a fundamental problem for the company.
What’s Next?
Current lackluster results from contents may not be a big problem if the company’s future contents return to growth. However, I believe this scenario to be unlikely.
The management team seems to be addressing the current problem of weakening financial performance with cost-cutting measures. The company is restricting content spending, cutting employees, and restructuring some operations. These measures are necessary, but I do not think the company is addressing the fundamental problem. Disney is primarily a content company. The company needs to consistently produce contents that reach a global audience as this can grow Disney Plus’s customer base and Disney theme park customers through successful franchises. If Disney fails to produce truly global content in the future, cost-cutting may only be a temporary solution. Thus, I think Disney’s management team is addressing the current crisis in the wrong way. How will the company stop an entry barrier while satisfying existing fans for existing Marvel and Star Wars franchises? What will the company do after popular franchises such as Toy’s Storyend with new movies Elemental having a hard to finding success? How will the company’s content reach global audiences once more? Until some of these critical questions are addressed, I continue to believe Disney is too risky.
Financials
On the bright side, Disney is not fragile. The company has about $10 billion in cash with about $45 billion in long-term debt. It is true that the debt load is burdening, but the company has been reporting over a billion dollars in quarterly net income fairly consistently quickly after the pandemic creating a strong financial performance for the company to manage the debt. Further, Disney’s total liability to asset ratio stands at a healthy 46%.
Disney can certainly survive a short turmoil. However, if the company continues its lackluster performance, the toll on Disney’s financial health may alter my view of the company’s financial health in the near future.
Summary
Disney has a problem. Its latest movies have been reporting poor results with no clear solution to the problem. Further, the management team seems as if they are not addressing the two main reasons for this phenomenon. One, consumers may not go watch a movie since they could simply save money and wait until it is released for Disney Plus members. Unless it is truly a popular film, an incentive to watch a movie may be diminished compared to pre-pandemic times. Two, not all consumers may agree with the direction Disney as a company is pursuing. The company has been releasing more progressive content that was met by backlashes in many regions around the world hurting not only the financials but also Disney’s image. Therefore, I am maintaining my sell rating on the company.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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