The Walt Disney Company (NYSE: DIS) has historically been a small player in the global cruise sector with a passenger capacity of around 17,000 across its five ships compared to the industry leader Carnival Corporation (NYSE: CCL) which boasts a passenger capacity of close to 350,000 across its nine brands. Disney is planning to double its passenger capacity by the end of next year with the addition of three new ships, which seems a prudent move given the struggles faced by Disney’s theme park business today. A couple of months ago, the company warned that operating profits for the Experiences segment may fall significantly short of analyst expectations in the upcoming quarter due to challenges faced by the theme parks business. However, in the coming quarters, higher cruise revenue may offset some of the decline in theme park revenue, enabling the Experiences segment to meet investor expectations.
Why Are Disney's Parks Slumping?
Disney stock, after hitting a 12-month high of $122 last April, crashed below $100 last week with investor fears mounting over a disappointing financial performance in the foreseeable future. The theme park business is to be blamed for these fears. There are several reasons behind the slowdown in theme park revenue growth, including inflationary pressures that have impacted consumer spending, the elevated costs of operating theme parks in the post-pandemic era to meet regulatory guidelines, and the notable rise in digital entertainment options since the pandemic. The company’s decision to hike theme park ticket prices dramatically has also played a key role in this sluggish growth. According to analysts, these price hikes surpass the inflation rate, which has spooked consumers.
The Takeaway
Wall Street analysts are mostly in favor of the company’s decision to bring new ships online to grow the cruise business. According to Bernstein analyst Laurent Yoon, the doubling of passenger capacity will boost Experiences segment revenue, improving investor sentiment toward the company. According to the analyst, this move will lift Disney’s cruise revenue to $5.1 billion in Fiscal 2026 from just $2.5 billion in the current Fiscal year. UBS analyst John Hodulik also struck a positive note on this decision, claiming that an aggressive expansion of cruise capacity will help de-risk the medium-term outlook for the theme park business.
Overall, the expanding cruise business is a positive development but investors may want to keep a close eye on cruise market trends to determine if this move will offset some of the lost theme park revenue.
Both Dilantha DeSilva and Stocks.News have positions in Disney.
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Dilantha is a former buy-side equity analyst who now contributes to Seeking Alpha, GuruFocus, TipRanks, and ValueWalk. He is the founder of Beat Billions, a premium investment research subscription service on Seeking Alpha’s Marketplace. He has appeared on CNBC and Bloomberg to discuss stock markets and the global economy.