For much of this year, Walt Disney Co (NYSE:DIS) has been a sore disappointment. If I had to summarize its challenges, I would say that Disney suffers from a second round of growing pains. Prior to the streaming revolution, the entertainment giant had a significant edge. With streaming and the relatively easy distribution of original content, Disney has fierce rivals, reflecting in the lowly DIS stock price.
One of the biggest and ongoing problems is ESPN.
Cord cutting, declining sports viewership and the NFL anthem protests have all combined into a perfect storm for DIS stock. Management has also made some questionable, and I would argue unnecessary decisions. For instance, Disney was forced to cut its Frozen short Olaf’s Frozen Adventure from its Coco screenings.
It turns out that audiences didn’t exactly love watching 20-minute films ahead of the film they came to watch. Who would’ve thought?
But finally, things are starting to turn around for the Magic Kingdom. The Wall Street Journal recently broke the story that Disney is re-engaging talks with Twenty-First Century Fox Inc (NASDAQ:FOX). As our own Dana Blankenhorn reported, DIS stock jumped last month when Disney execs sought to purchase Fox’s entertainment assets.
In the fresh resumption of talks, Fox is looking to sell some of its key assets, including its movie and TV studios. Also, Fox’s stake in Hulu may be up for negotiations. Fittingly, Fox’s FS1 sports channel is not one of the discussed assets, nor presumably would Disney be interested.
Upon the latest news, the DIS stock price closed up nearly 5%. During intra-day trading, shares were up more than 7%. But given some of the not-so-pleasant history with DIS, should investors believe this rally, or jump ship while they can?
Will Re-surfaced Talks Impact DIS Stock?
On the surface, this deal, should it go through, would solve many problems. Disney is aggressively moving into the streaming-content sphere, looking to compete against Netflix, Inc. (NASDAQ:NFLX). To even up the odds, the entertainment firm not only needs content, but great content. Acquiring Fox’s entertainment assets would be a major plus for DIS stock.
Say what you want about Fox News and its politics. When it comes to riveting and engaging content, they’re one of the best in the business, in my opinion. Moreover, Fox owns the X-men franchise, which might be a game-changer.
As we all know, Disney has a penchant for “big league” deals, most notably its acquisition of the Star Wars franchise. They’re milking that for all it’s worth, including sequels, spin-offs, merchandise and theme-park rides. And guess what? Unless you’re a complete Luddite, you’re digging Star Wars’ rejuvenated brand.
What people aren’t digging is the DIS stock price, which hasn’t always reflected this fundamental enthusiasm. That could change with a potential Disney-Fox deal. This year hasn’t been a friendly one for the movie industry. To survive, you need strong products and strong brand recognition. The X-men franchise provides both for Disney.
Still, not everyone is convinced.
From Blankenhorn’s aforementioned article, he believes that this deal doesn’t solve either company’s underlying problems. Disney’s streaming service is unproven, and it will need to cut into the time viewers watch Netflix. Blankenhorn also asserts that both DIS and FOXA are woefully behind in video games.
For today’s young consumers, video games are where the real magic happens. Unless Disney has an answer for that sector, this deal may not matter.
You Can Trust DIS to Complete the Rally
Before diving into DIS stock, investors should consider Blankenhorn’s warnings. Like any deal, Disney’s venture into streaming content has significant risks. It might pay off, like it did with Star Wars, or it might not.
With that said, I favor the optimistic perspective. Disney isn’t just about spending money; it has a clear strategy on what to do with its assets. Aside from the ESPN liability and other uncontrollable factors, they’ve overall done a solid job maximizing their resources. I expect similar results should Fox agree to sell its entertainment treasures.
I’m also optimistic on this latest news because of the market’s positive reaction. Yes, the DIS stock price soared on Monday, but the biggest beneficiary is Fox. Over the trailing one-month period, FOXA shares are up over 32%. Subsequently, I regret being bearish on FOXA following its Bill O’Reilly and World Cup qualification disasters.
Lastly, I took the view that the DIS stock price had fallen far enough. While I wasn’t a big fan of the challenges it faced, let’s be real: this is Disney, not some fly-by-night operation. At some point, you have to trust that this blue-chip giant will plug its holes.
So far, I’m liking what I’m seeing.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
