Back in May, I sold my shares in Walt Disney Co (NYSE:DIS).
I had recently written a negative piece about the company, calling it more a beast than a beauty, and finally took my own advice, selling out the shares in my retirement account at about $107 each.
On October 16, Disney opened at $97.38 per share.
I won’t claim to be a genius here. The fact is that cord-cutting has shaken the confidence of many investors in the stock and that overall growth continues to slow.
DIS stock is due to report earnings for its 2017 fiscal year on November 9. It’s expected to report revenue of $13.6 billion and earnings of $1.18 per share, or about $1.8 billion. That would be a bit better than a year ago when revenue was $13.142 billion and earnings $1.10 per share, or $1.771 billion.
But it’s still not growth.
Talk Is Cheap for Disney
The problem can be found in Disney’s earnings statement. Media and networks, especially the ESPN sports networks, remain the biggest piece of its business. Those numbers keep declining slowly, even while revenue from amusement parks keeps growing.
All the company’s movies, from the Star Wars and Marvel franchises to its Pixar animated films and live-action extravaganzas, represent no more than 20% of its business.
Beyond simple cord-cutting due to the high cost of sports rights, the ESPN problem is the same one that took CNN down a decade ago, and is taking websites down as I write this.
Talk is cheap. It is cheaper to show people arguing than it is to generate a news story, or in this case to show a game. It’s cheaper to watch someone read this story to you out loud and argue with a friend about it, than it is for me to write it. And while you may read this in three minutes, you’ll watch that for 10 minutes, or more.
TV and internet economics are thus linked.
Disney and ESPN decided to dance with this devil years ago, running SportsCenter highlights 24 hours per day, 7 days per week, built on the personality of its hosts. It then added argument shows. Given the demographics of who’s not cord-cutting (yet) — older people and city folk — they went for a more “urban” and “diverse” flow.
But beyond any controversy, the fact is that consumers are on to this and are switching to cheaper “skinny bundles” or internet streaming. The move is accelerating and younger people aren’t taking up the cable habit.
The Answer Is Unclear for Disney Stock
In August, CEO Bob Iger dropped the bomb while announcing the third quarter’s results. DIS stock is buying out its technology partner, BAMTech LLC, and becoming Netflix, Inc. (NASDAQ:NFLX) with its own lineup of paid streaming services, starting with sports and extending into other forms of entertainment in 2019. As part of the move, Disney has pulled its content from Netflix, including Star Wars and Marvel movies.
Disney is planning on breaking bulk audiences down to individuals and selling them one by one, building its own back-end operation to handle subscriptions. It hopes to earn a premium price for this by separating its library into services for different audiences and recreating the old bundled price. Disney can break sports into its constituent leagues because ESPN has contracts with many leagues.
Risks of a New Model
This could work, but there is now more risk in Disney stock than there has been in decades. Half the analysts following the stock think this will work. The price to earnings ratio has fallen to 17, slightly below the general market.
DIS stock could be set to soar, as our Neil Martin believes. But cracks are appearing in the Magic Kingdom façade, as our Will Healy says.
My own view is that the results won’t be known for a few years, and I’m willing to wait before jumping in.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance, The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this story.
