Walt Disney (NYSE:DIS) stock has been rather frustrating the past few years. While broad markets have soared, DIS has been left behind. The Disney stock price actually sits below an all-time high reached more than three years ago.
Shares of Disney have shown some life of late, as the DIS stock price touched a 30-month high in early August before again pulling back. Were I a DIS shareholder, I’d prepare for more range-bound trading ahead.
Some of the uncertainty surrounding Disney has been lifted, and many of the major moves have been made. Disney, by its CEO’s own admission, is trading short-term earnings for long-term profits. While investors wait on the fruits of those investments, the Disney stock price may stay stuck for another couple of years.
Disney Moves but DIS Stock Doesn’t
To be sure, Disney isn’t standing idly by as the content and distribution worlds change rapidly. Disney bought the “Star Wars” franchise and ramped up output from that universe. To further strengthen its content, the company has acquired entertainment assets from Twenty-First Century Fox (NASDAQ:FOX,FOXA) in a $71 billion deal. It’s rolling out its own streaming services to compete with Netflix (NASDAQ:NFLX). That includes a streaming version of ESPN, whose subscriber losses have been a multi-year weight on DIS stock.
The changes now are nearing an end. Disney lost a bidding war with Comcast (NASDAQ:CMCSA) for the U.K.’s Sky plc (OTCMKTS:SKYAY), but the better phrasing is “lost.” DIS is actually is up 3%-plus on over the past five trading days, as investors seem happy to let Comcast acquire the British satellite giant. Comcast shares, in contrast, have dropped roughly 6% over the same range.
As Bernstein analyst Todd Juenger pointed out on Monday, Comcast is paying a huge premium. Fox’s 39% stake in Sky is soon to be owned by DIS. So Disney can use that cash — roughly $15 billion USD — to fund the Fox acquisition. And it avoids taking on even more debt to fund the Sky deal.
That bit of good news might seem like enough to jumpstart a rally in DIS stock. But the stock remains relatively close to the high end of its multi-year range. Even with the Comcast-Sky-Fox-Disney bidding wars now seemingly settled, the reshaping of Walt Disney isn’t over just yet.
More Hurdles for Disney
There’s still the matter of Disney’s actual pivot to streaming. Disney’s own services are set to launch late next year. Then there’s the sticky matter of what to do with third-party streaming service Hulu. Once the DIS-FOX tie-up is official, Disney will own 60% of the platform. Comcast will own 30%, with the remaining 10% held by AT&T (NYSE:T).
What will Disney do? As Juenger wrote:
[Much speculation centers on] how important Hulu is to Comcast, how much Disney cares about having Comcast as a minority shareholder and board-seat holder, and how the closure of Sky might impact that. There are theories that Fox could try to use its voting power on Sky shares to pressure Comcast to sell its stake to Disney. There are theories that Comcast could trade its future licenses for Disney content on Sky to get a larger participation in Hulu.
As the analyst wrote, “Disney has a lot of options” when it comes to Hulu. And no doubt the market will be watching closely.
But even Hulu is just a small part of the overall move toward streaming by DIS. And it’s possible that, at the moment, investors aren’t quite understanding just how significant that shift will be in terms of earnings. As The Hollywood Reporter pointed out, Disney is giving up billions of dollars in licensing revenue as it pulls content back from licensees like Netflix, Comcast, and Amazon.com (NASDAQ:AMZN). Those revenues have huge margins – and their loss will hit Disney’s profitability in the near term.
As CEO Bob Iger told THR, “There will be an impact on our bottom line in fiscal ’19” due in large part to the loss of revenue from Netflix. “You’re going to go through a period of time where you’ve reduced your profitability somewhat,” Iger added.
Will Investors Wait for DIS Stock?
Whether that shift is priced into the Disney stock price isn’t clear. Juenger, in reiterating a ‘market-perform’ rating, wrote that “we continue to believe that Disney’s transformation will take longer and cost more than the market is prepared for.” The Street, on the whole, is forecasting an increase in FY19 EPS (7%-plus), while Iger seems to float at least the possibility of a year-over-year decline.
The broad point here is that even with all the big moves of late, the transformation of Walt Disney isn’t finished — or close. Disney has tons of new content. It’s setting up new distribution channels. But it will take years (not quarters) for the success or failure of those initiatives to become apparent. A late 2019 launch means streaming won’t profitable until 2021 … at the earliest. Billions of dollars in marketing and infrastructure spend will accompany that launch.
In the meantime, pressures at ESPN aren’t abating. Star Wars releases will slow down, per the THR interview with Iger. Earnings here likely stay relatively stagnant for the next several years
That alone doesn’t make DIS stock a sell, though I remain skeptical, as I’ve been for some time now. At the very least, shareholders need to realize that Disney still has years of change ahead of it. It has years of market commentary about its streaming offering and Netflix and cord-cutting and subscriber losses. In other words, even if Disney looks very different, the next few years might sound quite similar to the last few. And I don’t think that will be good news for the Disney stock price.
As of this writing, Vince Martin has no positions in any securities mentioned.
