If you’ve followed my work over the years, you can easily surmise that I’m prone to adventurous investments. As a result, I don’t typically favor blue chips like Disney (NYSE:DIS). That said, I’m willing to give Disney stock a fair chance, as the underlying company has essentially reinvented itself.
In particular, the Magic Kingdom now features an enviable and indomitable media portfolio, thanks to its buyout of Twenty-First Century Fox’s (NASDAQ:FOXA) entertainment assets. As long as management plays their cards right, they are guaranteed huge demand inflows. Over the long run, DIS stock offers a consistently-lucrative channel that you can’t find elsewhere.
A prime example is this year’s box office numbers. The top three grossing movies are all Disney movies. Combined, the releases account for nearly $2 billion of gross revenue, with each film averaging $662.5 million. Again, this dominance represents a major selling point for Disney stock.
Disney and the Competition
It gets worse for the company’s competitors. Out of the top ten film releases, DIS owns half the slots. The biggest grossing non-Disney film this year is Comcast’s (NASDAQ:CMCSA) Universal blockbuster, “Jurassic World: Fallen Kingdom.” But with a total gross of less than $417 million, its results seem paltry to Disney’s astronomical ticket sales.
Another factor that supports DIS stock is media content. Within the top-ten films, half of them were based on comic-book franchises. All but one belonged to either the science-fiction or action-adventure genres. Surprisingly, a heart-wrenching drama like “A Star is Born” is ranked 11.
Clearly, this generation has no time for legitimate art. But that suits Disney just fine as the media giant specializes in the content that people want to see.
Nevertheless, questions have started to creep up about DIS stock, and they deserve consideration.
Should Investors Cool off on Disney Stock?
Our own Dana Blankenhorn wrote an eye-opening piece recently, declaring that DIS stock is a blue chip in name only. On the surface, the claim sounds ridiculous. But as you drill deeper, his thesis becomes alarmingly cogent.
For one thing, Blankenhorn succinctly countered one of my main bullish arguments. He wrote that investors are “betting that people will keep going to movies, but that business is inherently risky.” Indeed it is.
A decade ago, movie studios featured a bit more content diversity; the top-ten films weren’t all based on comic books. In addition, we saw tighter competition among several different distributors. Go back two decades ago, and the competition was even more dynamic.
So while Disney dominates now, the stats prove that consumer tastes can change dramatically in a generation. Therefore, Disney stock faces a generational challenge that bulls should at least recognize.
Another warning that Blankenhorn cites is the company’s world-famous theme parks and resorts businesses. He writes:
Disney is investing more in parks than it is in its movie division, doubling the size of the Disney cruise line, adding new attractions to its U.S. parks, Disneyland Paris and the Disney Resort in China, and increasing security, because a single terrorist attack could ruin the whole thing.
The risk is two-fold. My colleague mentioned that “political tensions are increasing around the world,” thereby indirectly increasing the risk to Disney stock. Second, management has levered itself to a physical entertainment platform in an obviously digital world.
This segues into the Magic Kingdom’s not-so-magical streaming endeavors. Although Disney currently has the price advantage against Netflix (NASDAQ:NFLX) while simultaneously levering its content licensing, streaming hasn’t paid off.
To Blankenhorn’s point, maybe it will. But admittedly, DIS stock hasn’t looked great in recent sessions.
Brace Yourself for Turbulence
While acknowledging the risks, I’m confident that the longer-term picture for Disney stock remains viable. For instance, the box office is not a guaranteed revenue source for DIS, but it’s pretty close. Sure, consumer habits have changed, but they’ve actually changed in Disney’s favor.
In other words, moviegoer interests have consolidated towards the comic-book inspired or science-fiction themed genres. Films that fall outside these categories won’t attract attention. Therefore, it’s unlikely that competitors will upend DIS stock in this arena.
This dynamic also benefits Disney’s streaming campaign. Their franchises attract audiences in both the big and small screens. By using these franchises as the dangling carrot, their platform should eventually start raking in the profits.
Finally, I have a positive take on the parks and resorts division. DIS owns the top five most-popular amusement parks in the world. In addition, the third to fifth-most popular parks are located in Japan.
This is significant because Asian markets love Disney-related experiences. Moreover, Japan features a high GDP per capita with a declining nominal population. What happens when you have an Asian market with both rising GDP per capita and an increasing population?
Of course, I’m talking about Shanghai Disneyland. So far, its growth rate is astronomical.
But despite all the good news, we must acknowledge the obvious. As Blankenhorn stated in a previous article, we’ve entered a bear market. As a result, using bullish fundamentals to forecast Disney stock nearer-term is a fool’s errand. Get ready for volatility but don’t deny yourself a discount when you see it.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.