Walt Disney (DIS) is, without a doubt, the most successful diversified entertainment company on the face of the earth.
That doesn’t mean its stock price is immune to exaggerated zigs and zags, though: in August, DIS stock plunged 22% as markets worried that subscriber losses mentioned by CEO Bob Iger in the third-quarter earnings call could signal a secular shift away from cable networks, Disney’s biggest source of revenue.
Shares have since recovered, and DIS stock is up about 13% on the year at the time of this writing.
Going forward, how much should Disney investors worry about “cord-cutters” and the shift to streaming web content? What about its theme parks and movie franchises?
Zooming out and looking at Disney as a whole, it’s still an awfully powerful company, and I fully expect DIS stock to do well again in 2016.
ESPN Still Strong
DIS owns a large portfolio of cable networks, but its most important one is easily ESPN.
The “Media Networks” segment of the business, in which ESPN acts as the driving force, accounted for $23.3 billion in revenue in fiscal 2015, or 44% of the company’s $52.5 billion haul. Operating profits of $7.79 billion were more than 53% of Disney’s cumulative $14.68 billion in operating profits.
Importantly, ESPN has exclusive, multiyear broadcast deals with the NBA and NFL, as well as rights to broadcast the college football playoffs, now in their second year. That gives the network a wide moat.
Going into 2016, Disney stock is threatened by the cord-cutting phenomenon. But Disney’s management is some of the most competent and forward-thinking in corporate America — it’s no coincidence that Bob Iger also serves on Apple Inc.‘s (AAPL) board of directors.
So what has DIS done to insulate itself from more cord-cutting in 2016 and beyond?
It’s hedged itself heavily. Along with Comcast (CMCSA) and 21st Century Fox (FOXA), it owns Hulu, a streaming video service that charges a monthly subscription.
And while Netflix (NFLX) is one of Disney’s staunchest competitors, it’s also a huge customer. NFLX licenses old content from Disney, and has purchased the rights to create new original content with Disney’s intellectual property (Jessica Jones, Daredevil), which DIS also produces.
Going forward, Netflix and Disney have also inked an output deal where Netflix will make original movies using Disney IP.
Star Wars
Let’s not ignore the elephant in the room: the re-ignited Star Wars franchise should be a huge boon to DIS stock in 2016 and beyond.
The opening weekend of Episode VII in the U.S. was explosive, setting a new record with $238 million in box office revenue. The reception was even more impressive overseas, with the flick taking in $279 million internationally. That’s a total of $517 million in a matter of days.
Of course, that’s just the tip of the iceberg. Box office sales will continue to soar, and the movie hasn’t even opened in China yet (that happens Jan. 9). Toy, video game, Blu-ray/DVD sales and other derivative revenues could bring the total Star Wars: Episode VII haul to $6 billion to $7 billion or more in the next year alone.
That’s great, but still just a modest chunk of the $56 billion Wall Street expects Disney stock to report for fiscal 2016. The real benefit of owning the Star Wars franchise will be their perpetual nature: DIS may very well make another Star Wars installment every 18 to 24 months until the end of time. (The next one in the trilogy is slated for a May 2017 release.)
Shanghai Disneyland
Perhaps the biggest development for Disney stock in 2016 will be the debut of Shanghai Disneyland. CEO Bob Iger himself said it was the thing he was most looking forward to in 2016, and recently expressed his strong confidence in China as an engine for growth.
Parks and Resorts are a vital part of DIS stock; in FY 2015 they accounted for $16.2 billion in revenue, or nearly 31% of Disney’s overall revenue. We don’t know yet if Shanghai Disneyland will open in Disney’s fiscal 2016, which ends in September, but it will be opened in calendar 2016.
The park is said to be more high tech than any current Disney park in existence, and DIS is building it largely as a bet on the expanding Chinese middle class. Upon its completion, there will be an incredible 300 million Chinese within three-and-a-half hours of the park.
So at the end of the day, the cord-cutting trend is something Disney investors should keep an eye on. But unless you’re willing to bet against Jedi, the demand for live sports and the fastest-growing middle class in the world, don’t bet against DIS stock.
2016 is stacking up to be a great year.
As of this writing, John Divine was long AAPL stock. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
