Disney Smashes the Box Office, But Will It Last?

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Aafter a record 2019 wo Walt Disney (NYSE:DIS) Grossing in 33.3% of domestic box office gross, the media mogul’s momentum has been muted due to the COVID-19 pandemic. But Disney is hoping to reverse the trend this year with a stacked list of highly anticipated movies and exclusive Disney+ content.

The film starts off great 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. Additionally, the company is missing out on important revenue streams at the box office from some of its largest international markets – namely China.

Here’s a look at what Disney has in store for fans this year and how its exposure to international audiences is feeding into the investment thesis.

Image source: Getty Images.

How is Disney’s international presence?

As a vertically integrated international media conglomerate, it’s no surprise that Disney is dependent on the global economy. Disney has six resorts, four of which are overseas (Paris, Tokyo, Hong Kong and Shanghai). Disney also has five cruise lines that attract international travelers. The company’s films are shown around the world, and Disney+ is a global service.

During its fiscal second quarter 2022 conference call, the company announced that Disney+ is expanding to 53 new markets in 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 those, or just over 32%, were domestic.

In fiscal 2019, Disney’s biggest box office year (not to mention its highest-grossing year on record), the company grossed $3.76 billion at the domestic box office and $7.35 billion at the international box office box office totaling $11.12 billion. That year, about 10% of the media company’s total box office revenue came from China, thanks largely to $614 million in ticket sales Avengers: Endgame.

Missed opportunities from China

Shanghai Disneyland has been closed since March 21, even as China eases its COVID-19 lockdowns. Hong Kong Disneyland reopened on April 21st. But Shanghai Disneyland and Hong Kong Disneyland have been closed for much of the current year. These headwinds contributed to an operating loss of $268 million for Disney’s international parks and experiences segment in the fiscal second quarter. On the other hand, domestic parks and experiences generated $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 $912 million in box office receipts worldwide ($391 million domestically and $522 million internationally), an outstanding result. But the film probably would have done even better if it weren’t for the lost revenue from China, Russia and Ukraine. For example, a similarly functioning film such as e.g Captain Marvel generated over $150 million in box office receipts in China alone in 2019, so it’s safe to say Doctor Strange lost significant ticket sales in these markets.

Disney can handle headwinds

Disney is undeniably exposed to international markets — but less than many investors might think. For example, it has a minority stake (47%) in Shanghai Disneyland. And domestic park performance was so strong last quarter that the company reported the highest park, experience and product sales and operating income for any other quarter in the company’s history — even after accounting for its international losses.

Most of the box office receipts are international. But again, Disney is used to getting about 10% of its box office sales in China. Its diversification allows it to absorb a slowdown in many markets without being hit too hard.

The bigger concern for Disney is the threat of continued inflation and a possible recession in the US, in addition to the discussed international headwinds. That double whammy could cause the business to slow further and further prevent it from beating its record fiscal 2018 profit.

Disney can’t control the broader economy, but it can lay the foundation for a strong content roster and make ongoing investments in its parks that strengthen its brand and set the stage for long-term growth.

Rather than overweight Disney’s quarterly performance, it’s better to look at the bigger picture of the business the company is building and how streaming integrates well with 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 buy 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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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