Walt Disney Co (DIS) stock is lagging the S&P 500 both in 2016 and over the last year; shares of the iconic entertainment company are off 4.3% year-to-date and 8.8% in the last year, while the benchmark S&P is up 0.5% and down 3.4% in those respective periods.
That sort of meaningful underperformance can’t make DIS stock owners very happy. Especially when longer-term five- and 10-year returns each still crush the market — what’s amiss at the House of Mouse?
And, more specifically, why would Disney choose — out of seemingly nowhere — to end a franchise that was doing remarkably well?
DIS Stock: In Need of Consistency
Earlier this month, Disney discontinued its Disney Infinity division, its “toys to life” division that makes toys and action figures that “come to life” in an accompanying video game.
If you can put yourself in the mindset of a kid, it doesn’t get much cooler. Toys coming to life? Sign me up.
The video games, by the way, were compatible with all the major consoles: The Sony Corp (ADR) (SNE) PlayStation 4, Vita and PlayStation 3, Nintendo’s Wii U and Microsoft Corporation’s (MSFT) Xbox One and Xbox 360 were each on board, giving DIS stock owners an encompassing array of systems through which it could hawk its popular games.
Not surprisingly — especially considering Disney’s intellectual property (IP) includes the Star Wars, Pixar and Marvel universes — Disney Infinity was killing it. In fall, Pacific Crest estimated that DIS had sold $200 million in Disney Infinity Star Wars games and merch alone.
So why, DIS stock owners might wonder, would Disney kill the goose that laid the golden egg?
In short, Disney wants more guaranteed, predictable revenue streams with lower variability and risk … and that’s precisely what licensing its IP provides. Instead of developing its own games, it’ll license the use of its IP to third-party game developers.
Year after year, DIS stock owners must tolerate the inherently uncertain revenue flow from box office receipts, and with the concern over whether there’s any growth left at the Disney-owned ESPN in an age of cord-cutting, Disney needs all the low-risk revenue streams it can get its hands on.
Shanghai Disney, the first DIS theme park in mainland China, should also provide a big ol’ stream of steady revenue. The park hasn’t even opened yet, and already 1 million Chinese have visited the “Disney Town” shops and restaurants to see what the fuss is about and get a look at the nearly finished park.
With 300 million Chinese living within a three-hour commute of Shanghai Disney, DIS stock should get some nice help there.
At the end of the day though, DIS stock owners shouldn’t worry about the shuttering of the successful Disney Infinity franchise. Licensing makes sense, especially since one of the things that makes it far less risky than other strategies is the fact that there are no costs involved: With no employees, overhead, etc., all licensing revenues go straight from the top to the bottom line.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
