Walt Disney Co (NYSE:DIS) stock hasn’t done much of anything for the past several years. While the market has rallied to new highs and tech stocks have posted outsized gains, Disney stock hasn’t gone anywhere. It has simply been stuck in neutral around $100 for 36 months now.
Why? The era of Netflix, Inc. (NASDAQ:NFLX) and streaming TV is here. That is hurting traditional TV viewership, and Disney rakes in a whole bunch of money from traditional TV viewers through its TV channels ESPN, ABC and Disney. Thus, as those channels lose viewers to Netflix and streaming TV, Disney loses money.
This dynamic has persisted for several years and kept DIS stock stuck around $100. But that is about to change.
Disney is making a huge pivot into streaming over the next two years. The first part, which is just an appetizer, was the launch of streaming-style ESPN, called ESPN+, this past spring. The second part, which is the main dish, is the launch of a Disney-branded streaming service in 2019.
Considering the robust and diverse popularity of Disney’s content, that Disney-branded streaming service will launch to huge demand in 2019. As such, the narrative at Disney will shift from cord-cutting declines to streaming subscriber growth. That pivot alone will catalyze a big turnaround in DIS stock over the next several years.
Plus, Disney is also set to benefit from still red-hot Parks and Studios businesses, and ESPN could stage a big rebound thanks to sports gambling now being legal.
Altogether Disney stock is now staring at what will likely be a huge turnaround over the next several years. Buyers today should be handsomely rewarded in a multi-year window.
Here’s a deep look at the prospects for this turnaround:
Disney & Pixar Movies Are Popular
When it comes to Disney’s big streaming-led turnaround, it is all about how much demand there will be for a Disney-branded streaming service. When it comes to gauging demand, it’s all about understanding the strength of the platform’s featured content.
Fortunately, no one has as robust or diverse a pipeline of content as Disney.
It all starts with the Disney classics and Pixar movies, which are essentially the heartbeat of family and children movie entertainment. Disney’s animated and family films are not only exceptionally popular, but they are also well-received and widely watched. This has been especially true in recent years.
Disney’s biggest animated film in 2017 was Beauty and the Beast, which received a 7.2 rating on IMDb with over 200,000 votes. The movie also grossed $504 million domestically, making it the second highest grossing film of 2017.
Also in 2017, Coco was a big hit. That animated family film received a sky-high 8.5 rating on IMDb with over 170,000 votes. The film grossed $210 million domestically, putting it at number 13 in 2017’s highest grossing films list.
Disney’s big family movies in 2016 were Finding Dory and The Jungle Book, both of which did extremely well. Finding Dory received a 7.3 rating on IMDb with over 190,000 votes. It grossed $486 million at the box office, the second highest total in 2016. Meanwhile, The Jungle Book received a 7.4 rating on IMDb with nearly 225,00 votes. It grossed $364 million at the box office, the fifth highest total in 2016.
Going back further, Disney family movies like Inside Out, Finding Nemo, Wall-E and Up were all major hits both at the box office and in terms of user ratings. Going even further back, Disney classics like Hercules, Mulan, The Lion King, Aladdin and The Little Mermaid were also major hits.
Disney’s streaming service will presumably feature all of these family movies, making the service an almost must-buy for families with young children.
Star Wars Movies Are More Popular
We all know, however, that Disney’s film slate doesn’t begin and end with Pixar.
Disney recently acquired LucasArts, and in doing so, acquired the rights to one of the most successful, popular and widely loved movie franchises of all time.
Let’s just look at the numbers to quantify this success.
Star Wars Episode I received a 6.5 rating on IMDb with nearly 620,000 votes. It had an adjusted domestic gross of $828 million, good enough for 18th of all time. Meanwhile, Episode II received a 6.6 rating on IMDb with 540,000 votes and had an adjusted domestic gross of $490 million, good enough for 97th all time.
Episode III fared better, with a 7.6 rating on IMDb and over 600,000 votes. It also did quite well at the box office, with an adjusted domestic gross of $543 million, which puts it at 67th all time.
Episodes IV, V and VI were mega-hits back in their day. Episode IV received an 8.6 rating on IMDb with roughly 1.05 million votes. Episode V received an 8.8 rating on IMDb with over 980,000 votes. And Episode VI received an 8.3 rating on IMDb with nearly 810,000 votes. As it relates to box office success, Episode IV is second all-time in terms of adjusted domestic gross, Episode V is 13th all-time and Episode VI is 16th all-time.
The newer installments under Disney production are also doing quite well. Episode VII received an 8.0 rating on IMDb with 740,000 votes. Its adjusted domestic gross was $990 million, good enough for 11th all time. Meanwhile, Episode VIII received a 7.3 rating on IMDb with 380,000 votes and had an adjusted domestic gross of $619 million, which is 42nd all time.
Offshoot film Rogue One received a 7.8 rating on IMDb with over 420,000 votes. It gross $554 million domestically on an adjusted basis, which is 60th all time.
All in all, the average rating on IMDb for a Star Wars film is 7.7, which is very high as anyone who follows IMDb ratings knows. Meanwhile, the average adjusted domestic gross of a Star Wars film is $824 million, which would be good enough to make it the 19th best-grossing film of all time.
Clearly, there is an immense demand for “Star Wars” film content. And that demand spans several decades.
That is why Disney continues to pump out 1-2 new Star Wars movie per year. Given the recent strong box office and ratings numbers for Disney-produced Star Wars films, it doesn’t look like Star Wars fatigue is even close to setting in. Thus, Disney will continue to pump out a lot of Star Wars content over the next several years.
Presumably, all that content will flow-through to Disney’s streaming service. Thus, that streaming service becomes a must-buy for almost anyone who loves to watch Star Wars content.
Marvel Movies Are the Most Popular
Although Star Wars is very popular, Marvel has somewhat stole the throne of ultimate movie popularity recently. Fortunately, Disney owns Marvel, too.
The number one grossing movie so far in 2018 is Black Panther. Number two? Avengers: Infinity War. And it is only a few weeks old. Both movies also scored well on IMDb, with Black Panther getting a 7.6 rating and Infinity War getting an 8.8 rating.
Marvel’s big movie in 2017 was Guardians of the Galaxy Vol. 2, which scored a 7.7 rating on IMDb. It was also the number five grossing movie in 2017.
In 2016, the big Marvel movie was Captain America: Civil War. It scored a 7.8 rating on IMDb while being the third highest grossing movie in 2016.
In 2015, it was Avengers: Age of Ultron, which scored a 7.4 rating and was the number three grossing film of the year.
Guardians of the Galaxy and Captain America: The Winter Soldier came in number 3 and 4 at the box office in 2014. The year before that, Iron Man scored a second place finish at the box office. And the year before that, the first Avengers movie scored first place at the box office.
Just as there is an immense demand for Star Wars content, there is equally immense and perhaps even more diverse demand for Marvel content. I say more diverse because Marvel movies have recently stepped into the realm of humor, with movies like the newest Thor and Guardians of the Galaxy introducing new levels of comedy that were previously unseen in superhero movies. This has undeniably widened Marvel’s reach and helped the studio perform increasingly well at the box office.
Despite the duo of Infinity War movies being hyped up as the culmination of a decade of Marvel films, Disney will likely continue to produce Marvel movies en masse over the next several years. The characters will simply change, as we shift from the era of Iron Man, Captain America and Thor to the era of Spider-Man, Captain Marvel and Black Panther.
As Disney CEO Bob Iger said on the last conference call, the Marvel universe has roughly 7,000 characters, any of whom Disney could make a movie about. Thus, the Marvel movie pipeline extends out many, many years.
Again, presumably, all of these movies will flow into Disney’s streaming service. Thus, any Marvel fan will likely look at Disney’s streaming service as a must-own.
Fox Movies Aren’t Bad, Either
An important development in Disney’s streaming efforts is that the media giant is trying to acquire entertainment assets from Twenty-First Century Fox Inc (NASDAQ:FOXA). That is a huge deal because those entertainment assets are quite robust, and only further strengthen Disney’s content war-chest.
Recently, Fox movies haven’t been great. Fox’s top movie so far in 2018 is the latest installment in the Maze Runner series, which scored just a 6.3 rating on IMDb and wasn’t a top 10 earner at the box office.
But Fox owns assets like “X-Men” and “Deadpool,” both of whom find their roots in the Marvel Universe. Thus, Disney acquiring Fox would integrate X-Men and Deadpool into the Marvel Cinematic Universe, and create highly anticipated movies that feature the Avengers alongside the X-Men.
Overall, while Disney’s acquisition of Fox isn’t a game-changer, it could add significant firepower to Disney’s streaming service. By integrating more characters into the Marvel Cinematic Universe, Disney could produce even more Marvel movies than ever, the sum of which will flow through into the streaming service and boost the service’s value prop.
Disney Dominates the Big Screen
Even without Fox, Disney dominates the big screen, and that is great news for Disney stock.
So far in 2018, Disney is behind the top two grossing movies. Together, those two movies account for 75% of the total gross dollars from the top five movies.
In 2017, Disney was also behind the top two grossing movies of the year, and three of the top five. Altogether, those three movies accounted for 65% of the top 5 movie grossing total.
Back in 2016, Disney had a great year. They were behind the top three movies of the year, and four of the top five, and accounted for 83% of the top five movies grossing total.
Similar story in 2015. Disney had the number one movie, and three of the top five while accounting for 64% of the top five gross total.
Disney was a bit weak in 2014, accounting for two of the top five movies. The studio was behind “only” 38% of the top five gross total in that down year.
Overall, over the past five years, if you take the top five movies of each year, Disney is behind 13 of them, so more than half. More than that, on average, Disney movies carry the load at the box office. Over the past five years, Disney movies have accounted for roughly 65% of the top five gross total.
That is domination. While Netflix is dominating streaming, Disney is dominating the big screen.
Big Screen Success Will Translate Into Streaming Success
It really is only a matter of time before this big screen success for DIS translates into streaming success.
Average admissions tickets in the U.S. run around $9, but that includes matinees and cheaper ticket prices. Personally, I’m paying around $15 per ticket to go to the movies. More realistically, then, people are shoveling out about $15 per movie ticket. That is more than the monthly price of the most expensive Netflix account.
Despite that relative expensiveness, consumers are still flocking in droves to see Disney movies. Whether it be a family animated movie or a Star Wars film or another Marvel movie, consumers are continuing to pay $15 per ticket to see these movies on the big screen.
Thus, demand is strong for Disney content. And it is price resilient. Not even $15 movie tickets can deter consumers from going and seeing their favorite animated or superhero film.
Iger has promised that the Disney streaming service will launch at a significantly lower price point than Netflix. Netflix runs around $10 per month, so let’s say that Disney’s streaming service costs about $7 per month.
Who wouldn’t pay that?
Everyone and their best friend are currently paying at least $9 (and more likely $15) to go see a single Disney movie on the big screen. Why wouldn’t everyone also pay just $7 per month to see every Disney movie ever from the convenience of their own home?
From this perspective, it seems inevitable that Disney’s big screen success will eventually flow through into streaming success. Disney has all the best content in the world. Now, they are figuring out how to best deliver it to consumers.
Streaming Tailwinds Will Offset Cord-Cutting Headwinds
Cord-cutting won’t stop over the next several years. If anything, as all content moves to an over-the-top model, cord-cutting headwinds will only accelerate in the future.
But Netflix is now prepared to handle these headwinds. With a strong streaming service set to launch next year, and with demand for that service set to be very robust, Netflix is creating a powerful streaming tailwind.
Will this streaming tailwind be enough to offset persistent cord-cutting headwinds?
I think so. Look at how fast Netflix has grown. Then look at slowly traditional TV viewership has eroded. Netflix has grown its subscriber base by five-fold since 2011. Traditional TV viewing time has halved since 2011. Broadly speaking, then, streaming TV viewership is increasing at a more rapid rate than traditional TV viewership is declining.
DIS will now be a part of this trend. Consequently, streaming growth should more than offset cable declines, and operational results at DIS should dramatically improve in the coming years.
Everything Else At Disney Will Benefit, Too
Disney is much more than just its cable and studio business. But everything is connected and starts with content. So if the content business is doing well, everything else will do well, too.
Case and point: Disney’s Parks business. This business has been red-hot recently because the Studio business has been red-hot. The more quality content that Disney produces, the more Disney’s mind-share grows among consumers. The more that happens, the more people want to visit Disney parks.
Plus, with each new movie Disney makes, that is yet another opportunity for Disney to expand its Parks business. They can build Star Wars rides, Captain America rides, Spider-Man rides, Inside Out rides, so on and so forth. Because of this, Disney’s Parks business is constantly growing, and the Parks will never become outdated so long as the content business remains relevant.
Moreover, the more quality content Disney produces, the more toys, video games, and accessories the company will sell.
In total, there is a huge trickle-down effect at play with DIS. When the company produces quality content and delivers that content in an optimal way to the consumer, the rest of Disney’s businesses benefit as a result of increased mind-share.
ESPN & The Gambling Catalyst
One thing we haven’t discussed yet is that sports gambling is now legal in the U.S.
That is a big deal for ESPN, the premier media platform for everything sports.
The exact implications of sports gambling now being legal in the U.S. are unclear as of today. All that is clear is that the value of sports, in general, has risen by a ton as a result of the Supreme Court ruling and that every organization related to sports has become significantly more valuable.
Why? Because of a bunch of money that wasn’t there before is now going to start flowing through sports.
ESPN is one of those organizations that became significantly more valuable thanks to sports gambling becoming legalized. It isn’t terribly clear as to what steps EPSN will take to capitalize on this catalyst, but there is no doubt that they will take steps.
This ruling couldn’t have come at a better time. With cord-cutting headwinds sticking around and ESPN losing subs, gambling could be the perfect catalyst to reignite the growth story at ESPN.
Disney Stock Is Cheap With Big Catalysts on the Horizon
Disney has a bunch of strong catalysts on the horizon, from an exceptionally strong movie line-up to a forthcoming streaming service to ESPN getting a boost from sports gambling.
But DIS stock isn’t priced as if any of these catalysts are going to do much to offset current cord-cutting headwinds.
Not only has Disney stock not gone anywhere in 3 years, but the stock’s forward earnings multiple is now just 14. Over the past five years, Disney stock has traded around 17-times forward earnings. Meanwhile, the market currently trades at 16.5-times forward earnings.
Thus, Disney stock is not only trading at a near 20% discount to its historical average valuation, but also a 15% discount to the current market-average valuation. Neither of those discounts makes sense, considering Disney is one of the most recognizable brands in the world with the most valuable content in the world and some of the best real estate in the world.
As such, it does not appear as though Disney stock is priced for a big turnaround. But a big turnaround is coming, led by robust growth in the company’s streaming business. Over time, then, Disney’s results will improve and the valuation will normalize dramatically higher. That combination should lead to huge share price out-performance over the next several years.
Bottom Line on DIS Stock
The big turnaround in Disney stock has arrived. This thing won’t shoot higher like a rocket ship. But as the excitement surrounding the company’s growth prospects through streaming and gambling build over the next several quarters and years, DIS stock will head materially higher.
As of this writing, Luke Lango was long DIS.
