Walt Disney Co (NYSE:DIS) is one of the world’s most recognized and respected brands. From its movies to its TV shows to its parks to its toys and games, Disney has created a global empire with secular appeal across multiple channels.
Despite that, Disney stock has been a dud on Wall Street for quite some time. Over the past 3 years, Disney stock is down 6.6% while the S&P 500 is up more than 25%.
The weakness is DIS stock can be attributed largely to cord-cutting. Despite the company breaking box office records seemingly every year and its parks only getting more crowded, Disney stock has been stuck in neutral because its Media Networks business (the business surrounding its TV shows like ESPN and Disney Channel) has been in decline.
People simply aren’t watching cable television anymore. Cord cutting is taking over. Everyone is going over the top. And Disney is getting left behind.
But not for long.
The company is adjusting to this era of over-the-top content distribution. This adjustment makes Disney stock a great long-term holding.
Here’s a deeper look.
Why Black Panther’s Success At The Box Office Matters
My whole thesis on Disney stock is that between Disney, Pixar, Marvel, Star Wars, ESPN and ABC, the company produces the best, most diverse, and highest demand content in the world. The company is just struggling to figure out the best way to distribute that content. As media consumption habits pivot from linear to internet, Disney will likewise pivot their content distribution from linear to internet. When that happens, the weakness in Disney’s Media Networks business will be fixed. And DIS stock will roar higher.
The first part of this thesis is critical: that Disney produces the best content in the world.
I think investors have to look no further than Black Panther to see evidence of this. Regardless of your feelings on the movie (I personally liked it), there is no arguing that it has had huge box office success. Black Panther has led at the box office for 5 straight weeks. Most recently, it beat out Tomb Raider. That means that a 5-week old Black Panther beat out a brand new Tomb Raider in terms of consumer demand.
That is pretty wild. And it speaks to just how much more popular Disney’s movies are than movies from other studios.
Perhaps more impressively, that popularity isn’t waning over time. The Marvel Cinematic Universe began in 2007, and more than a decade later, Black Panther has bypassed The Avengers become the most successful domestic Marvel movie ever .
Moreover, Disney’s average gross revenue per film was $200 million in 2017. That figure has grown 10% per year since 2000. Ticket prices from 2000 to 2017 have risen by only 3% each year, so clearly, the 10% growth per year in Disney’s average gross revenue per film is a sign of consistently growing demand.
Better yet, a big part of those gains have come in the past several years. Over the past 3 years, Disney’s average gross revenue per film has grown by 28% per year.
Bottom Line on Disney Stock
In other words, demand for Disney content is only growing, despite cord-cutting headwinds. Over the next several years, Disney will launch its own direct streaming platforms. Those platforms will be met with high demand given Disney’s box office dominance, and Disney’s Direct to Consumer business will take off much like Netflix, Inc. (NASDAQ:NFLX) has taken off over the past several years.
Moreover, platforms like YouTube TV and DirecTV Now will gain in popularity and help offset cord-cutting headwinds. That should help stabilize Disney’s Media Networks business.
All in all, then, Disney will be just fine long term. That makes Disney stock, which is trading at a huge discount to its 5-year norms, a great long term buy-and-hold at these levels.
The whole entertainment and media world is migrating from linear distribution to internet distribution. Disney’s business is being disrupted in this transition.
But now Disney is adapting to this transition. And because the company makes the best content in the world, Disney will come out on the other side of the transition as a winner.
As of this writing, Luke Lango was long DIS.
