Disney (DIS) stock is doing something it hasn’t done in quite some time: It’s plunging.
After a vicious downgrade from Wall Street research firm Bernstein yesterday, DIS stock fell off a cliff, losing about 5% — but is the selloff overheated?
It all depends on how you feel about a few factors: momentum vs. fundamentals, the state of the cable industry, and what quality content is worth nowadays. Let’s take a quick look at each of these points as they relate to Disney’s stock.
Momentum vs. Fundamentals
Different investors have different styles and, broadly speaking, there are two camps: growth and value. Growth investors tend to focus more on the company’s future potential to expand rapidly, and are generally more likely to pay attention to technical analysis, or the aesthetics of the chart.
Value investors are more interested in the company’s cold, hard, numbers, and on that note DIS stock doesn’t look too bad: Shares trade at just 18 times forward earnings, precisely in line with the valuation of the S&P 500.
From that perspective, Wall Street’s telling us it thinks DIS is just an average, ho-hum member of the index. I happen to believe that’s not true, and that shares deserve to trade at a premium to the broader index, but I’ll get to that point a little later. First, let’s examine the (admittedly compelling) argument about why Disney stock doesn’t deserve to trade at a premium.
Cable Industry in Disarray
There’s no denying the cable TV industry is falling apart, and that’s bad news for Disney. With streaming services Netflix (NFLX), Amazon Prime Video (AMZN), and Hulu encouraging consumers to “cut the cord,” traditional cable subscriptions are going down, and bundles with Disney channels are falling as well.
ESPN is Disney’s most prominent cable asset, and considering that cable makes up 46% of Disney’s operating income, CEO Bob Iger’s comment that the company was experiencing “some subscriber loss” during last quarter’s earnings call spooked investors.
In an environment like that, Bernstein’s Todd Juenger downgraded both DIS stock and TWX stock on Thursday, saying that TV advertising “is undeniably in secular decline.”
Now, for the reason DIS stock still deserves a premium valuation: Simply put, The House of Mouse has some super high-quality content. Aside from ESPN and its own Disney channels, the company is also in the film business.
With Marvel, Pixar, and Lucasfilm — all brilliant Bob Iger acquisitions, by the way — accompanying its own movies, Disney has more priceless intellectual property than it knows what to do with. The Avengers, Star Wars, Toy Story, and Frozen are all Disney IP that it can leverage through sequels, theme park attractions, merchandising, and licensing.
DIS stock is, admittedly, a falling knife right now, and if you try to catch it on the way down you’re likely to get cut. But, if shares retreat to the mid- or low-90s, it’ll be tough not to fall in love with Disney, despite its flaws.
I’d wait before making a move on this one, but if it goes much lower, Disney could end up being one of the best value stocks in the market.
As of this writing, John Divine was long Sep 2015 NFLX $110 put options. You can follow him on Twitter at @divinebizkid or email him at email@example.com.