Disney Fiscal Q3 Commentary: Investors Blind to Delta Variant Threat

Disney Fiscal Q3 Commentary: Investors Blind Delta Variant Threat
Yinchen Niu/Variety Intelligence Platform; Bob Chapek/AP

Disney’s fiscal third quarter results finally showed substantive recovery following a brutal 18 months due to the COVID pandemic. And while the stock’s 5% after-hours gain reflects investors’ confidence in an encouraging bounce-back for business in the last quarter, another wave of challenges lies ahead. 

CEO Bob Chapek strove to project an upbeat tone on the Disney earnings conference call Thursday, repeatedly expressing confidence in his business. Optimism is wonderful but given the very real growing threat of the Delta variant, perhaps Chapek was a little too optimistic.  

That is not to discredit all the hard work Chapek has done over the past year and half. He took the helm at an extremely difficult time and has done a good job overall managing the company through the peak of a global pandemic. And the fiscal Q3 results were proof.  

However, Disney+ isn’t profitable yet, and in order to compete in the streaming wars, you must spend billions of dollars on fresh content to keep audiences happy. At Disney, the theme parks business is what funds these endeavors.  

After a very difficult 2020, the theme parks were ready to come roaring back. Disney parks in California reopened at the end of April, and Disneyland Paris finally reopened in June. After a roller-coaster ride, theme parks were on track to make a full recovery ahead of the seasonally strong holiday quarter. Disney’s theme parks generated $4.3 billion in revenue in Q3, which compares with just $1 billion in the same period last year and $6.6 billion in 2019.  

Chapek said on the call that a parks recovery was underway, adding that Disney parks are seeing strong demand and he remains bullish on the parks business going forward. But he also alluded to the uncertainty that hangs over the second half of the year. “We did not anticipate, nor did I think anybody— the resurgence of COVID with the Delta variant that would have such a significant impact on the marketplace,” Chapek conceded.

But the sentiment has shifted pretty significantly over the past several weeks. Americans are growing more uncomfortable attending amusement parks, according to weekly survey data released by Morning Consult. After seeing a steady increase in 2021, only 44% of respondents said that they felt comfortable going to an amusement park in August. 

Much of that hesitancy can be attributed to the rise in COVID cases over the past several weeks. Many are growing worried that the sudden influx of cases could result in another economic shutdown, which would prove detrimental to countless businesses, including Disney. 

If Chapek is forced to shutter the theme parks again, the rebound it just posted in fiscal Q3 could be undone by the next quarter. And if more variants arrive in the coming months, future quarters could be jeopardized as well. Consequently, investors who pushed up the stock after earnings today don’t seem to be appreciating how fragile the long-term outlook could be for Disney.  

The rise of the Delta variant could also pose trouble for Disney on the movie side. Two of the company's upcoming films, “Free Guy” and “Shang-Chi,” will be released exclusively in theaters for a 45-day window instead of a simultaneous release on Disney+ and in theaters, like its previous film “Black Widow.” 

That seemed like a good idea just a couple of months ago, but now not so much. Even Chapek admitted on the call that most of Disney’s current strategy was conceived when the pandemic environment was much healthier.  

Chapek has done a good job keeping investors happy thus far, but the real test will play out in the second half of this year, when investors assess how Disney manages the uncertain environment caused by the Delta variant.