Few companies are more directly impacted by the economic shutdown related to the COVID-19 crisis than Disney (DIS).  The company’s theme parks are closed.  Movies theaters are shut denying Disney the ability to launch the massive blockbusters from its Marvel, Pixar, Disney, and Star Wars franchises.  Sports are not being played, crippling viewership and ad revenue at ESPN.   The company has laid off and furloughed workers, eliminated its dividend, and announced deep cost cuts.  While still financially strong, Disney has more debt than usual due its acquisition of the film and TV studio and entertainment cable networks from Fox last year.

Given these headwinds, it is no surprise that DIS shares have fallen from $150 to less $90 at the March lows.  Since then the stock has recovered to $110 amid hopeful signs that theme parks and movie theaters can begin to reopen.  More importantly, the company has seen massive growth in subscribers at Disney+.  Current subscriber levels are nearing the low end of the 60-90 million target the company set for 2024.  Clearly, Disney+ has received a boost from stay-at-home orders around the world as households look for entertainment options.  A similar dynamic has played out at Netflix where the shares are trading at all-time highs.

Valuing Disney+ subscribers similarly to the implied value of Netflix subscribers suggests about half of the current DIS stock price is being attributed to the company’s streaming services.  The outlook for the company’s theme parks, films, and ESPN is highly uncertain until the timing and effectiveness of reopening the global economy can be ascertained.  This is obviously contingent on containing COVID-19 and minimizing any second wave of infections.

We always viewed DIS shares as a quality growth holding similar to other Northlake stocks like Alphabet, Apple, and Facebook.  Today, DIS is more cyclical.  We are OK with that as we believe it makes sense to own stocks at both ends of a barbell composed of quality, financially strong growth companies and cyclical, financially leveraged companies.  Northlake is willing to believe that one way or the other the world will get to the other side of the COVID-19 crisis.  When it does, there will have been a rare opportunity to own one of the world’s great companies and participate in the recovery in its stock price.  Patience is the word for a company as good as Disney.

DIS is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.  DIS is a net long position in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.