Shares in Walt Disney (NYSE:DIS) continue to rise, as investors remain confident the company will get streaming right. Rather than falling in the wake of Netflix’ (NASDAQ:NFLX) record quarter, Disney stock is expected to go even higher.
Morgan Stanley (NYSE:MS) finds it bullish that Disney will have 23 million streaming customers by 2024, ignoring the fact that Netflix already has 146 million. TV analyst Jim Cramer continues to put Disney on top of his rankings of communications stocks, with Netflix fifth, crowning Disney the “King of Content.”
This struck me as irrational exuberance when I wrote about Netflix on Oct. 15. I called 73 million paid international subscribers bullish, and the final number was 73.46 million. (Small wonder Netflix rose nearly 11% in overnight trade.)
Analysts are crowning Disney the king when it’s not going to have even one-fifth the streaming customers five years from now that Netflix has today?
The Disney Valley
Like a certain president, Disney has been distracting analysts from reality by making headlines which promise a lot tomorrow but deliver nothing but trouble in the near term.
Disney plans to close on most of 21st Century Fox (NASDAQ:FOX) Jan. 1 and has put a Fox executive in charge of all TV assets, where Peter Rice will need to quickly find $2.6 billion in “synergies,” laying off staff and matching Fox’ high pay with Disney’s lower pay. It’s a poison chalice he’s getting cheers for drinking from.
That $71.3 billion deal is not yet done. The European Union has scheduled its final review for Nov. 11 and Disney has reportedly offered unspecified “concessions,” because it will dominate in theatrical movies. It’s in movies, not TV, where Disney is strongest. How many people do you think will be going to movie theaters in 10 years?
Broadcast networks like Disney’s ABC now get just 5 million viewers and non-sport cable shows draw less than 1 million. Ratings are dominated by sports shows, talk shows, and “reality” shows that don’t syndicate.
The “third wave” of cable cord-cutting, in which people ditch wired connections entirely for wireless, has now begun and 42% of cable customers think the service is essential for “live events”, like sports.
It’s not. Disney says it now has 1 million households signed up for its ESPN+ service, at $5/month, and that has all the live sports you want, including obscure events (college soccer?) never seen on either TV or cable.
The problem is its numbers don’t add up. Disney gets about $9 per month per cable subscriber for ESPN, nearly twice what it gets for ESPN+, yet ESPN+ is still barely a blip on the radar. Disney bulls say they’ll have one-fifth of Netflix’ current subscriber base in five years and that’s why we’re supposed to buy the stock?
Disney Earnings
Disney next reports earnings Nov. 8 for the September quarter and end of its fiscal year. Expectations are modest, earnings of $1.31 per share or roughly $2 billion, revenue of $13.84 billion, about 8% more than a year ago.
It’s the theme parks that are now the star of the show, representing over one-third of its revenue, earnings growing at 20% per year while those from media networks continue to decline.
Disney shares are up 18% over the last year, its market cap is at $173 billion (against $151 billion for Netflix), and the Fox merger likely gives it at least two more quarters of grace with analysts, whose expectations will remain muted while those assets are digested.
A year from now Disney is going to hit a wall of streaming expectations. If it can’t get closer to where Netflix is today, the stock is going to crash.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.
