It’s impossible not to feel some concern when faced with the prospect of betting on content entertainment and theme park giant Walt Disney (DIS). Although it benefits from being a storied enterprise, the company is facing serious business challenges that will likely cause the stock to trade sideways in the short term. Nevertheless, investors can still make quick profits from a flat share price with options, and the net result of owning some of the world’s top content franchises should prove to be a net positive for patient investors in the long run. Therefore, I am bullish on DIS stock.
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Ugliness in DIS Stock Clouds the Bigger Picture
When it comes to controversies, Disney seems to run counter to its family-friendly image these days. Nevertheless, I don’t think this will hurt it in the long term. The company suffered a black eye in the court of public opinion recently. Last year, a patron at the Walt Disney World and Resorts theme park in Florida suffered a fatal allergic reaction. It turned out that despite assurances from the staff of a restaurant the guest visited, her meal contained allergens – specifically nuts and dairy.
Inexplicably, Disney’s lawyers attempted to have the subsequent lawsuit overturned because the patron’s husband signed up for a free month-long trial of Disney+, the namesake company’s streaming service. The issue? Within the terms of the streaming service agreement is a note that “all disputes” with the Magic Kingdom would be resolved through arbitration. Understandably, Disney faced the ire of social media.
Still, it’s unlikely that this incident will indefinitely tarnish Disney’s image. Severe allergic reactions – including fatalities – are extremely rare but not unheard of. And while the attorneys were horrifically insensitive, it’s also somewhat par for the course regarding the profession.
Dispute with DirecTV
Another headwind that has been beating down on DIS stock is the underlying firm’s dispute with satellite television provider DirecTV, which I don’t think is as negatively impactful as some may think. Earlier this month, Disney-owned channels went dark on the platform. Naturally, this incident angered sports fans, as the entertainment giant owns ESPN and ABC.
One consequence of the dispute was that many sports fans were denied access to watch the U.S. Open tennis tournament. Even more problematic, the blackout disrupted highly anticipated college football games. It’s no wonder, then, that DIS stock gave up almost 22% of equity value in the past six months.
Though hardly an ideal situation, a similar conflict erupted last year between Disney and cable TV provider Spectrum. That eventually got resolved and the smart money would bet that another resolution is on the horizon.
Disney’s Content Is a Bullish Catalyst
Moving forward, management will likely turn to what’s been clicking for the overall business: compelling content. Despite the ebb and flow of the broader entertainment landscape, Disney continues to bring to the table material that resonates with fans, which I view as a bullish catalyst.
In fact, Disney’s Inside Out 2 became the highest-grossing animated film ever. Since exiting the box office in mid-June, the movie amassed $1.56 billion in global gross sales. In addition, the original “Inside Out” helped push Disney+ signups to over 1.3 million. Looking at the total direct-to-consumer business (which includes ESPN+), Disney saw the unit’s sales rise 15% to $6.4 billion.
Looking out into future quarters, Disney can leverage its many revered franchises, such as Star Wars and the Marvel Cinematic Universe, to bolster both its streaming business and the movie studio unit. As a result, there’s a lot to love about DIS stock – and that arguably makes the enterprise intriguing despite the warts.
Profiting from a Sideways Stock Price
Despite supporting evidence for a long-term bullish thesis in DIS stock, it’s difficult to argue against the short-term noise. As stated earlier, Disney hasn’t looked good in the charts over the past half-year period. Further, the smart money – based on TipRanks Unusual Options Activity screener – seems bearish on DIS. Given the long-term upside potential and current pressure from traders, DIS could enter a flat consolidation pattern. Nevertheless, investors can still profit from a sideways stock price.
One way of playing Disney at this juncture is to consider a bear call spread. Essentially, you would be betting that DIS stock trades below an upper threshold. Take, for example, the options chain expiring this Friday. An investor can choose to sell the $89 call at a bid of $0.79 per contract and buy the $92 call at an ask of $0.18 per contract. This trade yields an upper breakeven price of $89.61. In other words, DIS stock must stay below this price to be profitable. Ideally, the stock should land under $89.
The maximum reward for this transaction would come out to $0.61 per contract, while the maximum loss would be $2.39. This setup carries a risk-reward ratio of almost four to one; that is, for every $1 of income received, you must put $4 at risk. However, this gives investors some breathing room to still profit if the trade goes slightly against them. At the current price of $88.20, traders can let the stock price rise by $1.41 before actually incurring any losses.
Wall Street’s Take on Walt Disney
Turning to Wall Street, DIS stock has a Strong Buy consensus rating based on 19 Buys, four Holds, and zero Sell ratings assigned in the past three months. Furthermore, the average DIS price target is $118.53, implying 34.27% upside potential.
The Takeaway: Long-Term Strengths a Positive for DIS Stock
Despite Disney’s recent controversies and operational setbacks, the company’s unparalleled portfolio of timeless franchises remains its strongest asset. While recent issues, such as a tragic incident at Walt Disney World and disputes with DirecTV, have weighed on DIS stock, these problems are unlikely to permanently tarnish Disney’s image.
Moreover, the company’s ability to consistently deliver compelling content, like the record-breaking “Inside Out 2,” underscores its long-term potential. Although current market sentiment may be bearish, the intrinsic value of Disney’s franchise portfolio presents a scalping opportunity for investors who can navigate the short-term volatility with strategies such as a bear call spread.
