Should You Follow This Billionaire and Sell Disney Stock?

It’s a safe bet that we won’t see Dan Loeb at a waltz disney (SAY -1.98%) theme park anytime soon. The financier’s large and influential hedge fund operator, Third Point Management, revealed through a regulatory filing last month that it had exited its once-large position in The House of Mouse entirely.

We should never blindly follow a wealthy investor in or out of an asset. But Third Point has been right many times, so maybe it was wise to pull the trigger here. Let’s investigate.

Image source: Getty Images.

A tasty business

The recently discharged Disney stake hasn’t been in Third Point’s portfolio for very long. It was first revealed just over two years ago, shortly after the coronavirus pandemic really started to bite. Loeb and his team were the most excited about the company’s Disney+ streaming service, especially following the shutdowns and movie theater closures necessitated by the pandemic.

Although the famed hedge fund manager praised Disney and CEO Bob Chapek’s efforts with Disney+, he wrote in one of Third Point’s quarterly letters to investors that “While progress to date has been commendable, there is still more that can be done to realize the full potential of Disney streaming.”

Never shy about voicing an opinion, Loeb added that Disney+ should expand into an “all-you-can-eat” streaming platform. This monster buffet would include all theatrical content from the company’s busy movie studio, made available to all subscribers on the release date. This, of course, would run counter to the film industry’s traditional theatrical release cycle and possible downstream push into home video and streaming.

Disney throws Loeb’s suggestion to the wind and instead goes in the opposite direction. After trying out same-day Disney+ releases for some of its flagship films amid the pandemic last September, the company reverted to the standard “theater only” cinema debut model. One can imagine that this strategic shift did not please the people of Third Point.

Subscribers shock

If this change was a — or rather, the — reason why the hedge fund left the stock, this is certainly a valid reason. After all, as my colleague Fool James Brumley points out, Disney continues to lose money in the direct-to-consumer (DTC) business, of which Disney+ is a part. Worse still, the company is silent on its reasons.

Generally speaking, streaming services are not trendy for investors. Current indicator netflix notoriously suffered its first all-important sequential subscriber decline since 2011 during its first quarter. Even before that, the decline in the growth rate of this figure sounded alarm bells for many investors. Cue lights, camera — falling stock price.

Yet, as a Disney shareholder, I cling to my shares. I believe the company has more than enough financial cushion to continue absorbing Disney+ losses, at least for a while, and it is doing better than many credit it in its other business segments.

The company’s ever-critical media and entertainment distribution arm posted a respectable 9% year-over-year growth in the second quarter. This has been fueled by both its robust TV operations and the occasional crowd-pleasing blockbuster (like the Marvel Cinematic Universe’s latest offering). Doctor Strange in the Multiverse of Madnesscurrently the highest-grossing film of 2022 in this country).

Meanwhile, now that they are no longer subject to shutdowns and shutdowns, Disney theme parks are going gangbusters. That will certainly continue, as this summer tourist season is expected to be thick and heavy with travelers who haven’t taken any serious trips since the pandemic first hit.

As far as streaming goes, I don’t like these losses any more than Loeb. But let’s remember that Disney+ is a relatively young offering in the grand scheme of things, and since it remains hugely popular with audiences, there are plenty of levers the company can pull to push it out of the red. Earlier this year, for example, it announced it would launch an ad-supported budget tier for Disney+.

Buy the ticket, take the ride

Again, no investor should blindly follow another’s example, whether that investor is a high-flying hedge fund guy like Loeb or a humble jerk like the author of this article.

But I think Disney still has vast potential ahead of it despite recent misfires and losses in its DTC offerings. So, at least for me, I’ll be staying at the Mouse House for now.

About Barbara J. Ross

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