Will Disney’s Customer Experience Investments Hurt Growth?

Disney (NYSE: DIS) recently held an investor conference in Orlando, which turned out to be a mini-vacation for attendees with a visit to its theme parks.

Needham analyst Laura Martin attended the event and gained important insight into Disney developments and fundamentals.

She compiled some key takeaways, including the outlook for the company’s new immersive hotel idea, the positive changes the new park rides can bring to the business, and Disney’s competitive position when it comes to streaming.

Star Wars Hotel: a “high stakes” bet

Looking first at Disney’s new hotel concept, the $5,000 per stateroom for two days is an interesting concept that gives guests a very real Star Wars experience.

However, Martin fears that this concept only appeals to a niche market. A concept that took six years to conceive and execute seems like a “high-stakes” bet for the analyst.

Martin did a cost-benefit analysis and came away with several questions about the sustainability of this model. Assuming 100% occupancy, the hotel would bring in $91 million per year.

Considering the costs associated with maintaining this hotel, Martin sees healthy profit margins. However, Martin is not sure that Disney can maintain 100% occupancy.

Advantages and disadvantages of the new rides

Martin had mixed reviews of the theme park rides. She pointed out that the new rides, which are more about storytelling than flow, should attract more people than the park can handle. This, in turn, can hurt the ratings of the company’s customers.

In addition, the greater number of guests waiting in 60-80 minute queues will benefit from the comfort of air-conditioned spaces, which means significantly higher energy costs over the next five years. Disney’s goal is to achieve self-sufficiency in electricity from its solar farms.

On the other hand, air-conditioned waiting areas during the warmer months of the year give Disney a key competitive advantage over Universal, Sea World and other parks in Orlando.

An expert’s take on Disney

Martin reiterated a Hold rating on Disney, based on the analyst’s belief that the consensus estimates are too ambitious, given the imminent high level of investment in its D2C business planned for this year.

Additionally, the analyst is also unclear on earnings contributions from Disney’s linear TV and movie releases this year as the world slowly gets vaccinated. She is confident, however, that Disney’s strong balance sheet can withstand longer headwinds on COVID-induced earnings.

Wall Street, however, is more optimistic about Disney’s outlook. Strong Buy’s consensus rating is based on 15 buys and five takes. DIS stock price projections indicate an average price target of $190.89.

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