Unless you’ve been frozen in Carbonite the last few months, you’ve probably heard of this little movie called Star Wars: Episode VII — The Force Awakens. It’s the seventh installment of the wildly popular Star Wars franchise, and it hits theaters nationwide next Friday.
And that’s great news for Disney (DIS) stock.
As you may know, Disney bought the Star Wars franchise — or, more specifically, Lucasfilm, the studio that owns the franchise — for $4 billion in 2012. Disney stock has returned almost 140% in the three years since the deal was announced, nearly triple the return in the S&P 500 during that time.
Those returns have accelerated in the last few months as The Force Awakens premiere draws near: DIS stock has risen more than 14% since the market bottom on Aug. 25.
The reasons are obvious: The Force Awakens is expected to gross in the neighborhood of $2 billion at the box office, thus recuperating half Disney’s entire Lucasfilm investment in a matter of a few months. It could rake in an additional $5 billion in sales of toys, video games and other merchandise in 2016 alone.
And this is only the beginning: there are two more Star Wars films still to come in 2017 and 2019 — plus spinoff films in between.
Star Wars Still a Small Slice of the DIS Pie
Of course, Disney is a $180 billion company, and Star Wars — as big a movie franchise as it is — still accounts for just a fraction of Mickey Mouse’s overall sales. ESPN, Pixar movies, the Disney World and Disney Land theme parks, and myriad other movie franchises (including the extremely lucrative Avengers films and other Marvel fare) fill out the rest of the Walt Disney Company pie.
DIS did more than $52 billion in sales in its recently completed 2015 fiscal year, and revenues are expected to swell to more than $56 billion in 2016. If this first (er, seventh) Star Wars movie generates, say, $7 billion to $8 billion in box office sales, toy and video game sales, DVD/Bluray sales, etc. over the next 12 months, it would still account for no more than 14% of Disney’s total sales.
Disney’s revenues have already been growing at a healthy 5% to 10% clip over the past couple years, thanks in part to comparable blockbusters such as The Avengers. And if the $56 billion consensus analyst projection is accurate, DIS will grow another 7% in 2016. In other words, Disney is forecast to grow sales in a Star Wars year at about the same rate as it did in a non-Star Wars year.
So, with overall sales growth about the same (or projected to be), it would seem the run-up in Disney stock, particularly in the last few months, has more to do with perception on Wall Street than top- or bottom-line growth.
The noise surrounding Star Wars is more deafening than the Millenium Falcon in hyperdrive right now. It should reach a fever pitch in about a week, especially if opening weekend ticket sales break all kinds of records.
But what happens when the noise dies down in February and March, and the Star Wars hype has subsided? Will investors still flock to DIS stock then?
My guess is no. That doesn’t mean DIS will suddenly come crashing back to earth, but the rally may stagnate.
Disney Stock a Buy Even Without Star Wars
That said, Star Wars will be back in many forms: When the DVD comes out, when merchandise sales figures start to trickle out, and especially when the next two movies come out in the coming years and the hype machine recharges its battery.
The Star Wars effect on Disney stock is very real, but it does have a shelf life. Thankfully for Disney investors, the company is doing just fine even without the help of the Jedi.
Bottom line: Disney stock would be a smart addition to your long-term portfolio, and Star Wars is just one of the many reasons why.
As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.
