As the Walt Disney Co (NYSE:DIS) prepares to report earnings on Feb. 6, investors who saw it as a can’t miss opportunity early in the decade are in a funk.
The continuing problems at ESPN, and with cable cord-cutting, have the stock in the same trading range it has occupied now for three years, with no end in sight.
Or is there?
Disney’s move to buy the bulk of Twenty-First Century Fox Inc (NYSE:FOXA), joined to its ambitions for streaming against Netflix, Inc. (NASDAQ:NFLX), have transformed the company.
Rather than focusing on the December quarter, where earnings of $1.62 per share and revenue of $15.2 billion is expected, investors are now looking toward 2019, when Disney launches its own streaming services and, it’s assumed, a raft of new shows based on its existing canon.
The Canon vs. The Data
After the Fox deal is complete, Disney will own most of the good stories, from Star Wars to Marvel, as well as the parks needed to monetize them fully. It will be king of the box office.
But that doesn’t matter as much as it once did.
The latest Star Wars movie did less business than the first entry in the trilogy, and while the company is already building a number of offshoots to the main story line, those will cost money to produce. They won’t be as profitable.
And soon, Disney-Marvel’s Black Panther is expected to be a hit by going outside the normal canon.
The problem is, as I wrote in January movie theaters are a dying screen. The battle is in the home, where Disney has promised to undercut Netflix pricing initially to gain share, and then start squeezing.
That will prove difficult. Netflix uses data not only to lead consumers to the next stream, but to drive its own production decisions. Disney bases production decisions on its canon of stories, and the guts of its producers. Netflix bases production decisions on data, on who’s watching what, and what that says about demand. This is a “secret sauce” Disney lacks, even with Fox.
Both Disney’s revenue from media networks like ESPN, and its studio, are on a downward slope, as is the consumer products division. The only growth is coming from the parks, which now represent over one-third of the business.
ESPN Everywhere
ESPN remains the wild card.
Right now, ESPN collects about $9 from every cable customer. It also collects consumer fees from cable subscribers for ESPN3 using “TV Everywhere”.
This is something Disney bears fail to understand.
Even if you “cut the cord” on cable, your broadband provider could still be charging you for “TV Everywhere.” Even if you get a “skinny bundle” through a Multi-Channel Video Programming Distributor (MVPD) like Sling TV, chances are you’re still paying for ESPN and other sports networks you may not want to watch.
If you don’t watch, however, you’re not in the advertising base. That’s the real financial risk from cord-cutting, the not-watching rather than the not-paying.
Analysts are Divided
As a result, analysts are divided on the future of Disney stock.
Portfolio Grader has put a sell on the stock, but our Bret Kenwell calls it a buy, based on the Fox deal.
What’s clear to me is that the nature of the stock has changed. Disney stock used to be a slam dunk. Now it’s a more speculative venture. Disney used to be about the current quarter. Now it’s about results a year from now or more.
If you’re willing to bet on what happens a year from now, Disney may be a good bet to make. But in today’s market few are making that kind of bet.
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.
