It seems that most investors are really worried about Walt Disney Co (NYSE:DIS) these days. After all, the future of its media business is pretty bleak. Cord-cutting keeps happening. ESPN keeps losing subs. Overall, the media business is really struggling. Revenues are starting to fall, and operating profits are getting sliced.
This isn’t anything new. Cord-cutting has been around for some time. This is why DIS stock has gone nowhere in the past 2 years, while the S&P 500 has roared 33% higher.
But don’t you worry about old Disney.
The company that Walt built has things figured out in the media business, and this really ugly cord-cutting narrative will soon turn into a really pretty subscription-growth narrative.
Disney Is Going the Way of Netflix
Why did cord-cutting become the thing to do?
I can think of a few really good reasons. They include Netflix, Inc. (NASDAQ:NFLX), Amazon.com, Inc. (NASDAQ:AMZN), Hulu, Youtube, and HBO NOW, to name just a few. You might as well throw Facebook Inc (NASDAQ:FB) and Snap Inc (NYSE:SNAP) on that list as well, considering how those social media platforms are now offering exclusive shows.
In today’s world, you don’t need a big, expensive cable subscription anymore to enjoy top-tier content. You can enjoy it for free on Facebook, Youtube and Snapchat, or for a fraction of the cost on Netflix, Amazon Video, or Hulu.
So why buy a big cable package? This is the era of internet entertainment and everyone is on it.
Soon, Disney will join the party.
Realizing that the cord-cutting trend is secular in nature and not going away any time soon (just look at ESPN’s recent sub loss numbers for September), Disney is going the way of Netflix. They have made some major acquisitions and leveraged the technology from those acquisitions to create over-the-top streaming services.
The first one, an ESPN-branded OTT streaming service, launches in 2018. The second one, a Disney-branded OTT offering, launches in 2019.
Demand for these streaming services will be huge.
It almost goes without saying that, in live sports, ESPN owns some of the most valuable content on the planet. Yes, consumers are cutting the cord on that content, but that is part of a bigger trend. When Disney launches its ESPN streaming service, demand is sure to be huge.
Why? Just look at the list of the top 20 most watched television broadcasts ever in the United States. They are all Super Bowls, with exception of slot number 9, which is occupied by the M*A*S*H series finale.
Look at the list for last year. Ignoring 2016 Election stuff, the list is dominated by sporting events. Look at the list for 2015. It, too, is dominated by sporting events.
Sports is what we watch — we just don’t like them enough to pay that hefty cable bill. So, when Disney launches its ESPN streaming service in 2018 and that hefty cable bill disappears, demand will be through the roof.
Demand will be just as big for Disney’s own OTT streaming service in 2019. That’s because Disney continues to pump out the best and most watched content in the world. Between Pixar, Marvel, and Lucasfilm, Disney has a robust film portfolio that dominates the box office every year.
So far in 2017, Disney has two of the top three grossing films as well, and will likely have four of the top five by year’s end, considering new Thor and Star Wars movies are set to release later this year.
Bottom Line on DIS Stock
Disney owns the best content in the world. The company is just having trouble distributing that content right now. They are stuck in the archaic, big-package cable business model.
But they are soon transitioning to a slim, OTT business model.
That will turn this current cord-cutting headwind into a sub-gain tailwind. With this in mind, and considering DIS stock is trading at just 10 times trailing EBITDA, now seems like the right time to buy the stock, before the company gets its act together in the media business.
As of this writing, Luke Lango was long DIS, FB, NFLX, and AMZN.