Walt Disney Co (NYSE:DIS) increasingly looks like a 2018 story — if you give CEO Bob Iger the benefit of the doubt — and that makes the coming year look like a lackluster one for DIS stock.
ESPN lost a record number of subscribers in October, an acceleration of a multiyear trend in which cord-cutters are leaving the sports network. ESPN’s importance to DIS’s operating profits is so critical that investors have a hard time focusing on anything else.
That might have them missing Disney’s wider strategy here.
Old-line technology companies are going through painful transitions of their own. Places like Microsoft Corporation (NASDAQ:MSFT), Cisco Systems, Inc. (NASDAQ:CSCO) and Oracle Corporation (NASDAQ:ORCL) are shrinking their traditional ways of distributing their goods and services in favor of the Cloud. Cloud-based services aren’t growing fast enough to offset losses in the legacy businesses — but they will eventually.
That’s kind of what DIS is doing with ESPN. Sure, consumers are cutting cords, but that just means Disney has to reach them through new means of distribution, like internet TV and related tech.
That’s why Iger is able to remain sanguine in the face of such hefty subscriber losses. He has a plan to make up for them, but it’s going to take time. As he said on a conference call with analysts after quarterly results:
“[N]ew entrants in the marketplace, particularly [internet TV services], are going to offer ESPN opportunities that they haven’t had before to reach more people. And in particular, we think those offerings, because of their pricing, user interface [and] mobile-friendly nature, are likely to cause more Millennials to either stay in the multichannel ecosystem as subscribers or to enter it when they might not have in the past.”
DIS Goes Over the Top
It’s a credible strategy but it doesn’t change the fact that DIS stock looks pretty pricey for a company in transition with a business as important as ESPN.
From analysts at Barclays:
“With newer Over The Top bundles emerging, ESPN should be able to moderate some of the impact of legacy [pay-TV] declines. To be clear, we continue to believe ESPN is secularly challenged, and its affiliate growth of around 3%, second-slowest after Viacom (VIAB) , underlines this fact. However, with more visibility at least over the next year, we believe the drag from this factor on the stock is likely to moderate.”
That can’t happen fast enough for ESPN given its rate of decline, but long-term bulls need to accept that this is going to be a slog. The network shed 621,000 subscribers in October. Advertising fell 13% in the most recent quarter and affiliate fee revenue — which is the highest in cable — also declined.
Click to Enlarge Happily for investors in Disney stock, the market is starting to buy in to Iger’s vision. DIS missed Wall Street estimates and yet shares are up in the aftermath of earnings. That’s a good sign. This is a stock that’s lost more than 15% in the last 52 weeks pretty much on ESPN alone.
But the market is going to remain very careful about this handoff to internet TV and over-the-top service providers. Like with CSCO and ORCL, it wouldn’t be surprising to see DIS stock just kind of tread water in 2017.
That said, investors can find some relief in that the Disney stock price does appear to have stopped declining. Shares have been rallying all month long. On a technical basis, the Disney stock price just overcame resistance at its 50-day moving average and 200-day moving average for the first time since May.
If it can turn the 200-day MA into a level of support, it will be a lot easier to go along for what could be a long run in the saga that is ESPN.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
