Last August, Wall Street laid the hammer down on Walt Disney Co (DIS) stock. Shares plunged from all-time highs above $122 to the $95 level in a matter of weeks following CEO Bob Iger’s declaration that Disney’s results were being negatively hit by “some subscriber losses.”
At the time, those three little words were the main cause for the decline.
Today, DIS stock is off about 4% in early trading, despite topping fiscal first-quarter expectations on both revenue and earnings per share.
The three little words in yesterday’s earnings release were eerily similar: “decline in subscribers.”
DIS Stock: Beholden to ESPN
The fact that DIS stock is taking such a pounding today, even after a blowout quarter, is understandably confusing. I’m not sure I agree with the reaction myself. I mean, EPS of $1.63 was up 28% from the year-ago period, and cruised past the $1.45 per share analysts expected. Revenue was also magical, rising 13.8% to $15.2 billion — breezing past the $14.8 billion consensus figure.
In fact, the Q1 2016 period, which ended Jan. 2, was the most profitable in the company’s 93-year history, driven by the blowout success of Star Wars: The Force Awakens.
Yes, this was literally a record quarter that smashed all expectations … and DIS stock owners are swiftly rewarded with a 4% selloff.
That’s where the three little words, “decline in subscribers,” come in. As I said in Monday’s Disney earnings preview,
“Expect close attention to be paid to anything relating to ESPN, Disney’s cash cow, which has been losing subscribers in recent quarters. All it takes is a word or two from Iger to send this thing plunging — or soaring.”
This time it wasn’t Iger’s words that tripped up Disney stock. It was the wording of the press release. Under the discussion of its Media Networks segment — by far Disney’s largest segment by revenue — DIS notes that while segment revenues rose 8%, the segment’s operating income actually fell 6%.
The report went on:
“Affiliate revenue growth was due to contractual rate increases, partially offset by a decline in subscribers and unfavorable foreign currency translation impacts.”
This raises the ever-present concern with DIS stock in today’s day and age: How quickly is the “cord-cutting” phenomenon taking hold, and what can Disney do to defend itself?
The simple answer is diversification, which Iger tried to emphasize on the earnings call, saying:
“The investment in Pixar, Marvel, Lucasfilm and the parks are designed to diversify our growth. If you look at the profile of this company there are four divisions that can deliver growth.”
While the upcoming opening of the $5.5 billion Shanghai Disney Resort should be a great long-term bet for Disney, that investment will take years to show a return on investment. And it’s not like the company can drop a new Star Wars every quarter. Episode VIII doesn’t come out until 2017.
By that time, ESPN subscriber figures will likely be even lower than they are today, and considering ESPN is the largest, most reliable cash cow the company has to its name, it’s no wonder Wall Street is taking this otherwise excellent earnings report so hard today.
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 firstname.lastname@example.org.