After announcing its takeover plans for Twenty-First Century Fox Inc (NASDAQ:FOXA, NASDAQ:FOX), Walt Disney Co (NYSE:DIS) is finally finding some upside momentum. Of course, the biggest question now is, can Disney stock maintain this bullish push?
As a long-term investment, I really like DIS stock. Its prior growth put it in my Future Blue Chip holdings even though the last few years have been unimpressive. While others have certainly done better lately — Nvidia Corporation (NASDAQ:NVDA) for example — Disney, too, has an impressive record over the last five years and beyond.
DIS stock’s five-year increase of 117% versus the S&P 500 Index‘s 87% gain is the investor’s version of a theme park E-ticket. Now though, should investors buy or avoid? Let’s look at some pros and cons.
Disney’s Deal With Fox
Disney’s deal with Fox is a great long-term move. It gives an incredible boost to Disney’s content portfolio, both on TV and in studio. Adding franchises like X-Men will lead to several big hits down the line as Disney ties it together with its Marvel lineup. There are many combination possibilities here and, given how much Disney has already gotten out of its superhero lineup, this deal will only enhance that potential.
Add in Fox’s animated division and its Avatar franchise and Disney could have multiple home runs.
Yet, while all of that might be good for the long term, there are questions over Disney stock in the short term. Why? Because this massive $52.4 billion deal is an all-stock transaction. The arrangement will be initially dilutive to Disney as it attempts to absorb billions of dollars worth of assets. I’m no arb trader, but I do expect some hiccups.
Of course, investors could shrug off those dilution concerns and bid up DIS stock on optimism over what’s to come in the future.
Dreaming of Streaming
Should regulators approve the deal, Disney will add Fox’s 30% stake in Hulu to add to its own 30%. That adds up to 60% of a streaming platform that recently said it has 17 million subscriptions.
Still, I don’t think Hulu will ever catch Netflix, Inc. (NASDAQ:NFLX) in the streaming race. For one, its owners — Disney, Fox, Comcast Corporation (NASDAQ:CMCSA) via NBCUniversal and Time Warner Inc (NYSE:TWX) — didn’t go all-in from the start. Unlike Netflix, the owners were not hellbent on changing the consumption method of video content. Why would they at the time?
That’s why they almost sold Hulu, in what I feel would have been a big mistake. Now though, Disney is venturing out on its own. It will roll out new streaming platforms for ESPN, Disney content and movies, breaking away from Netflix. It could own 60% of Hulu, increased subscribers by more than 40% from the 12 million in had in May 2016. Lets see how they leverage that into a new growth engine, too.
The upside in streaming is promising, but is also somewhat daunting. If we’ve seen anything from Netflix, it’s just how expensive this quest can be. Granted, much of Netflix’s current costs are for content, which is something Disney has no shortage of.
There’s Little That’s Last About the Jedi
It’s hard to see Star Wars in anything but a positive light. The Last Jedi has been the second-most successful Star Wars movie of all time, grossing $1.2 billion worldwide, so far. However, in its opening weekend in China, the film grossed just $28.7 million, while a film produced in China (The Ex-File: The Return of the Exes) took the top spot that weekend, bringing in almost $90 million.
Is this a big deal? Not necessarily, because China has never been a huge market when it comes to Star Wars. Plus Disney does such a great job with its licensed Star Wars products and memorabilia. But still, given how large Disney’s opening weekend was worldwide ($450 million), its new park in Shanghai and the size of the Chinese market, some may feel Disney is missing a big opportunity.
On the flip side, while Disney is lagging in China it also shows the potential to harness future sales in the country with the proper strategy.
Bottom Line on Disney Stock
The Disney stock rise has been very orderly so far. Off its November lows, DIS stock has been rallying higher and then pulling back to its 21-day moving average. Its two-year high sits near $115 and could give Disney stock some trouble in the short-term.
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If it pushes through, DIS stock can challenge its all-time high near $122 last seen in July 2015. There are a lot of longer-term positives happening right now. Even though the short-term could have some hiccups, I think Disney is doing what’s necessary to evolve for the next generation of content and content consumption.
While there are some negatives outlined above, I think the positives trump them.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell held a long position in DIS.
