Since late April, Walt Disney Co (NYSE:DIS) stock has been, well, a flop. The DIS stock price has gone from nearly $116 to below $100.
Even though the company continues to get traction with its theme parks and movie studio, Wall Street hasn’t cared much. The nagging issue for the DIS stock price is the potential disruption to the cable TV business, that is, the relentless trend of “cord-cutting.”
Consider that about 51 million U.S. homes have used streaming video services during this year, according to comScore. Meanwhile, there has been an erosion of viewership of traditional TV and cable offerings.
Such trends are sending shock waves through the traditional media world. Just look at the awful performances of companies like Viacom, Inc. (NASDAQ:VIAB) and Discovery Communications Inc. (NASDAQ:DISCA). Hey, is it any wonder that Time Warner Inc (NYSE:TWX) decided to sell out? Not really.
But regarding the DIS stock price, I still think the situation is not as dire as it may seem. If ever there is a company that should not only survive — but also thrive — in the current environment, it is Disney. The company, whose roots go back to the early 1920s, is one of the best marquee brands in the entertainment industry. Disney also owns Pixar, Marvel and Lucasfilm.
Keep in mind that the company continues to dominate the box office. For this year, DIS has scored big with titles like Beauty and the Beast and Guardians of the Galaxy Vol. 2.
Such content assets will prove incredibly important for the DIS stock price as the company plans to roll out its own streaming services. The plan is to have an ESPN offering come out next year and then follow this up with a Disney platform in 2019.
To get a sense of how this can work, and potentially benefit the DIS stock price, look at CBS Corporation (NYSE:CBS). In its second year, the company’s streaming service is on track to exceed 4 million subscribers. Note that the five-year goal was for 8 million. Its success has been a combination of a rich content library and original programming. No doubt, Disney has been watching this and is likely adding this to their playbook.
But the company is likely to see even more success. When it comes to developing compelling offerings, Disney has a standout track record. There will also be the benefit of the synergies with the other assets, such as promotions through the cable channels and theme parks.
Now the transition will likely not be without its problems. Disney gets about 30% of revenues and 43% of profits from cable television (as of 2016). There are also pricing pressures, such as from the NFL.
But in the meantime, there is strong diversification in the business as well. And besides, Disney has been proactive in finding ways to bolster its digital strategies with acquisitions and investments.
No doubt, the most notable deal is for BAMTech, which DIS has invested $2.58 billion for a 75% stake. BAMTech is a platform for streaming for Major League Baseball, WWE and the National Hockey League.
Bottom Line on DIS Stock
It’s true that Disney was too slow to capitalize on the streaming megatrend. Because of this, other players like Netflix, Inc. (NASDAQ:NFLX), Amazon.com, Inc. (NASDAQ:AMZN) and Hulu have been able to build strong user bases.
But then again, the DIS stock price seems to reflect this already. In fact, its valuation now is at fairly cheap levels, with a forward price-earnings ratio of 15x.
This is a pretty good entry point, especially given that the company appears to be putting together a solid strategy to benefit from growth in the streaming industry.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
