Disney (NYSE:DIS) Beats Expectations, But Represents a Risky Buy

If any company has taken a beating this year, it's Disney (NYSE:DIS). The House of Mouse has been pasted as virtually every sector of its operations has been impacted negatively by the pandemic: its parks are barely operational even eight months after lockdowns kicked in for the first time, its ability to produce movies has been hampered by social distancing rules, even its ability to sell advertising on its television channels—which should have been bulletproof from people staying home and watching TV in a pandemic—is crippled because advertisers don't want to spend. With Disney's earnings report, however, we find that Disney managed to snatch at least a small victory from the jaws of defeat.

Sometimes Not Too Bad is Good Enough

The earnings report was bad news for Disney, objectively, but thanks to a subjective win, the company pulled out some gains. In fact, the company was up just over 6% in premarket trading at one point, though it did give some of those gains back the closer we got to the opening bell.

The company posted a loss of $0.20 per share, which was well below the losses expected by a Refinitiv consensus, which looked for Disney to lose $0.71 per share. Disney also brought in revenue, and a pretty substantial amount for a company firing on maybe half its collective cylinders; it brought in $14.71 billion, which again was enough to beat the Refinitiv consensus of $14.2 billion.

As for the brief losses in the company's upward trend, one of the biggest points that hurt the company was the announcement that the January dividend was off the table. The company plans to return to paying dividends, but for right now, it's taking advice from Dan Loeb and his coalition, which called for Disney to stop paying shareholders to own stock and instead put that cash back into the company, and one point in particular: the company's saving grace.

Betting The Dividend on Disney+

That saving grace? Disney+. The company reported that its new streaming service now has nearly 74 million paid subscribers to its credit. That still isn't even half the subscriber load that Netflix enjoys at 195 million, but when you factor in Disney's other properties—like ESPN+'s 10.3 million and Hulu's 36.6 million—suddenly Disney looks like a sound competitor to Netflix (NASDAQ:NFLX). Since Netflix really only has Netflix—and a small sidebar of DVD-by-mail operations, at last report—this makes Disney a much more heavily diversified competitor.

Now, Disney is poised to take that dividend cash and plow it back into Disney+, producing more content therein and making it a more attractive option to keep the 73.7 million Disney+ subscribers in play and paying those monthly fees.

With Disney's California properties still closed down, its Paris properties recently closed, not to reopen until sometime next year, and its Florida, Hong Kong, Japan and Shanghai properties able to run at limited capacities, it's clear that the theme park side of Disney will be hampered for some time to come. Disney has been actively fighting back against the California closures, however, pointing out that its responses have produced sound, safe results vetted by only the finest science, but such calls have fallen on deaf ears.

An Optimistic If Risky Proposition

The analyst community, based on our latest research, still considers Disney a “buy”, and said consensus is actually a bit stronger than it was this time last month. Last month, there was one “sell”, nine “hold” and 18 “buy” ratings. Now, one of those “hold” ratings has departed the field, improving the ratio that much more. The price target for Disney shares has also been climbing, going from $134.62 last month to $138.40 this month.

There is, however, a lot of gray area surrounding Disney. Disney's diversification is hampered pretty badly right now, as its parks stay shuttered or half-operational, its production ability is limited, and its live television isn't selling ads like it used to. However, with a little over half the subscriber base of Netflix across all its streaming properties, and about a quarter of Netflix's share price, this may be a good opportunity to buy in on “the next Netflix” for comparatively cheap.

Disney pulled out a win here by losing less than the consensus expected. It also has a clear plan for moving forward despite the many challenges it faces right now. That's a good sign for the company, and for those who want to buy in with an expectation that things will improve later, you have logic on your side. Those of a more cautious bent, meanwhile, may want to hold off for a while until some of this gray area gets cleared up.