There is a lot of debate out there as to what comes next for entertainment giant Disney (NYSE:DIS). Everyone knows streaming will have an impact on Disney stock, but whether it’s a good or bad one remains undecided.
The bears are saying that this company is getting killed by Netflix (NASDAQ:NFLX). Disney has been slow to pivot into this space. And, even when they do finally launch a streaming service in 2019, they will be so far behind that it will be tough to catch up.
Plus, bears argue that it will be nearly impossible (and definitely expensive) for Disney to keep up with Netflix’s original content production rate.
As such, bears think Disney stock is doomed.
On the other hand, the bulls are saying that while Disney is getting killed by Netflix today, that won’t be true tomorrow. Disney owns the best content in the world. When it comes to streaming services, it’s all about content.
Thus, Disney will leverage its huge and valuable portfolio of original content to create arguably the best streaming service in the world.
Plus, Disney produces tons of cash flow from its other operating segments (Parks, Box Office, Consumer goods, etc). That cash flow will help fund rapid content production.
As such, bulls think the rally in Disney stock is just getting started.
Who is more right? When it comes to Disney stock, I side with the bulls.
The determining factor in the streaming world is content. Disney owns all the best content franchises. They’ve also shown an unparalleled ability to continue to develop great content with those franchises.
Thus, Disney streaming will become a huge product, and the success of Disney streaming will power Disney stock higher.
Disney Streaming Will Be Huge
The debate on how successful Disney streaming will be is quite intense. But, I think the answer is rather obvious.
Pundits want to point to the fact that DisneyLife, the company’s DTC service in the United Kingdom, isn’t doing all that well and is miles behind Netflix and Amazon (NASDAQ:AMZN), but that comparison makes almost no sense.
Missing from DisneyLife are essentially all the new and relevant movies, like Marvel titles, Star Wars movies, and Pixar films. Of course, DisneyLife isn’t gaining much traction because the service doesn’t have any of the relevant content which makes Disney so valuable.
Throw in Marvel, Star Wars, and Pixar movies. You change the whole landscape of that service.
Don’t believe me? Go look at anywhere where consumers are paying to watch content, either at the box office or through streaming platforms. In all those channels, Disney content (headlined by Marvel, Star Wars, and Pixar) dominates the most-popular, most-watched, and top-selling lists.
At the box office, Disney has accounted for three of the top five grossing movies so far in 2018, including the top movie. Same was true in 2017 and 2015. In 2016, Disney accounted for four of the top five grossing movies, including the top movie. Clearly, Disney dominates the box office.
Over at Netflix, Disney also has a pretty big presence. Naturally, Netflix’s “Popular on Netflix” and “Trending Now” lists are dominated by Netflix originals, and that is a good thing for Netflix. But, Disney has also a sizable presence on those lists, headlined by a few Marvel movies which always seem to be trending on Netflix.
On YouTube, consumers are spending a bunch of their movie-renting money on Disney films. Of the top 25 top-selling movies on YouTube, Disney accounts for nine of them, including the top film (Avengers: Infinity War). Meanwhile, on Amazon Video, Disney films are littered everywhere on the most popular and top movie lists.
In summation, anywhere that consumers are paying for movies, an unusually large portion of those dollars are going towards Disney content. Disney streaming is simply aggregating all that content, putting it in one place, and making it cheaper by turning into a subscription cost as opposed to an one-off cost.
As such, it seems pretty obvious to me that Disney streaming will inevitably grow into something massive.
Disney Stock Could Head Way Higher
There was a bunch of talk when Netflix passed Disney in market cap. Debate ensued as to whether or not Netflix was more valuable than Disney. Regardless, the takeaway is that the market gives huge valuations to over-the-top streaming entertainment businesses like Netflix.
It is unlikely Disney streaming ever becomes as big as Netflix. Netflix is exclusively streaming. Disney is streaming, box office, and other distribution channels. Thus, Netflix’s ultra-exclusivity should always keep it bigger than Disney streaming.
But in five years Disney streaming could easily be half as big as Netflix is today. That would imply a $75 billion valuation. That would be additive value on top of Disney’s current $160 billion market cap because any cable cannibalization will likely be offset by Parks and Box Office strength.
Thus, in five years, I could easily see Disney stock getting a $235 billion valuation. On just under 1.5 billion shares, that would equate to a price tag for Disney stock in five years of nearly $160. That represents nearly 50% upside over the next several years, a healthy return profile considering the stock’s low-risk nature.
Bottom Line on DIS Stock
Disney stock is a long-term winner because Disney streaming will be huge. Having said that, the bulk of the big Disney stock rally likely won’t happen until after Disney streaming launches in 2019. Until then, shares will likely trade sideways to slightly up.
As of this writing, Luke Lango was long DIS and AMZN.