It’s been a good couple of months for Walt Disney (NYSE:DIS). Some good if not quite Earth-shattering news has come the company’s way. And Disney stock has risen about 11% since the beginning of June.
The question will be if that good news is enough. Even with the recent gains, Disney stock remains stuck in a range that’s held for over three years now. The long-running weakness at the key ESPN unit hasn’t gone away.
I’ve long been a skeptic toward Disney stock, though as I wrote in May it looked like the stock was getting ready to move. So far, DIS has headed in the right direction, and there are reasons for optimism, but I still don’t see enough to project the stock finally breaking out after years of sideways trading.
Netflix Stumbles
A single quarterly report from Netflix (NASDAQ:NFLX) doesn’t dramatically change the case for Disney stock. But it’s certainly not bad news that Netflix subscriber numbers disappointed, both in terms of actual results for Q2 and guidance for Q3.
After all, Disney’s own streaming service is a key part of the bull case here going forward, as Luke Lango detailed last month. And modest weakness in Netflix’s growth suggests that Disney might have a chance take market share and/or co-exist with the streaming giant with its own offering.
Again, Disney’s services (whether under the Disney brand or that of ESPN) aren’t necessarily going up against Netflix across the board. But with the company potentially adding Hulu to its umbrella as well, a sign that Netflix isn’t bulletproof has to be considered good news for Disney.
Splitting the Baby
Meanwhile, Disney’s attempt to acquire Twenty-First Century Fox (NASDAQ:FOX,FOXA) is moving closer to success. Comcast (NASDAQ:CMCSA) had entered the fray with a bid of its own, potentially upending Disney’s plans.
Increasingly, however, it looks like the saga will end with a split decision. Disney will get Fox. Comcast will get UK broadcaster Sky plc (OTCMKTS:SKYAY). Fox was trying to purchase all of Sky – it already owns 39% – before the M&A drama started.
In the near term, that seems like good news for Disney stock. That outcome would limit the bidding war for Fox. Sky’s distribution capabilities are probably better in the hands of Comcast than in Disney. And the sale of Fox’s 39% stake would help fund a portion of the takeover.
Longer-term, the value of the Fox deal is uncertain. Given Disney’s struggles at ABC, Freeform, and of course ESPN, picking up more cable networks could be considered a negative. The deal also adds a good deal of debt to the company’s balance sheet.
But the content being picked up should strength Disney’s streaming service – and its negotiating position with distributors like Comcast and Charter Communications (NASDAQ:CHTR). At least for now, getting closer to the finish line for Fox seems like a positive step for DIS.
The Overwatch Deal
Meanwhile, Disney is placing a bet on the growing popularity of esports. A deal with Activision Blizzard (NASDAQ:ATVI) will bring the Overwatch League to ESPN (and ABC and Disney).
Esports is a growing market and this gives Disney a nice foothold as it grows. Of course, it also adds much-needed content for the existing networks, not to mention Disney’s streaming offerings down the line.
Is It Enough for Disney Stock?
At the least, the developments of the last week show a company making progress. Disney is adding content and probably has an improved outlook relative to competition against Netflix. A majority ownership in Hulu could finally give that platform some much-needed direction.
And DIS stock remains pretty cheap after the gains. It still trades at 15x forward earnings. And yet I don’t see enough to turn optimistic toward Disney stock. This still is a $160 billion company.
A single TV deal, whether it’s the NFL or esports, doesn’t move the needle much. Cord-cutting still is going to hurt ESPN profits for years, as the company loses viewers monetized at $8-$10 month whether they watch sports or not.
The Consumer Entertainment business has been weak. Studio profits should grow from Fox but organic growth has been pretty limited, even with some help from Star Wars of late. Outside of theme parks, this remains a relatively challenged and low-growth (in terms of profit) business.
Those problems aren’t fixed yet. Disney needs more. And so while the past two months have been progress, they’re only a small step toward where the company needs to be to get DIS out of its long-held range.
As of this writing, Vince Martin has no positions in any securities mentioned.
