Investors considering any long-term investment will know that a significant percentage of the value of any company is derived from its forward five-year free cash flow expectations. Taking a five-year view of any company is a prudent exercise. As such, many companies such as Walt Disney Co (NYSE:DIS) may be feeling the pinch of lowered top- and bottom-line expectations as a result of diminishing expectations among traditional cable media in a world dominated by streaming services such as Netflix, Inc. (NASDAQ:NFLX).
The cord-cutting phenomena which has hampered a wide range of stocks (and for good reason) has been felt by all media-related companies, and DIS stock is no exception. With the company’s media segment accounting for approximately 30% of the company’s top line and 45% of the company’s bottom line, cash flow expectations from this ultra-important segment will continue to drive the valuation of the overall business, despite the fact that the rest of the operating business has been performing incredibly well.
I’ve already highlighted some of the key fundamental aspects of what DIS could choose to do to battle the cord-cutting onslaught it has experienced as it relates to ESPN specifically. However, in this article, I’d like to touch on a few other important factors investors need to consider when forecasting DIS stock’s cash flows for the years to come.
Unmatched Portfolio of Intellectual Property for Disney
One of the key drivers behind the long-term sustainability and profit-generation ability of a business like Disney is the company’s unique portfolio of intellectual property. With a host of trademarks and brands which continue to have long-term appeal, the options available for DIS in terms of how it chooses to bring its content to market is one of the key factors investors should consider when pricing DIS stock.
Disney’s management team recently announced it would be ending its partnership with NFLX in 2019. Instead, they’re choosing to invest heavily in Disney’s own streaming service, a service which has seen steady (but not yet impressive) growth. One of the biggest risks streaming services provide companies like DIS is the fact that companies such as NFLX hold such a significant share of the streaming market.
But with a plan in place to create a rival service (following previous investments in companies such as Hulu), Disney stands ready to take on the industry’s best at a time when streaming appears to be taking over much of the discussion around entertainment and media delivery. ESPN’s fate in the world of streaming remains unknown. However, 2019 is shaping up to be a critical year for DIS stock as the company’s management team makes a bid to break into the streaming market in a big way.
“Re-Watchable” Content a Huge Plus for DIS Stock
There’s another major factor increasing the value of Disney’s intellectual property portfolio as compared to much of the original content produced by the biggest names in the industry. This relates to the fact that consumers tend to re-watch the vast majority of DIS content at a level which puts other streaming services to shame. Ask five-year-olds how many times they’ve watched Frozen or Finding Nemo, and one will get the idea. The ability for DIS to continue to create new content while relying on a base of existing content which will remain relevant for years (or in many cases, decades) to come is something other major companies in this space do not have the same ability to do.
With a massive cash hoard underpinning the company’s bid to reinvest and reinvent itself as a media-delivery platform in addition to a content producer, Disney has a unique product mix which is currently undervalued by the market. Looking at 2019 and beyond, I forecast earnings much higher than analyst expectations today.