Walt Disney (NYSE:DIS) stock has traded sideways for roughly four years now, and it’s not difficult to see why. When it comes to DIS stock, there’s clearly good news and bad news. As a result, DIS stock has stayed mostly between $100 and $120 since 2015.
Disney earnings for fiscal 2018 (ending September) highlight the split.
Per figures from the 10-K, 52%-plus of segment operating income came from Media Networks (42%) and Consumer Products & Interactive Media (10%). Both those businesses have seen profits fall in each of the last two years. The most notable negative catalyst has been the long decline at ESPN, a long-running problem for DIS stock.
The remainder of profits, however, came from Parks & Resorts (28%) and Studio Entertainment (19%). Those businesses are performing quite well. Blowout box office results for the Star Wars franchise and the Marvel Universe are driving big profits in filmed entertainment. And Disney’s parks business, without exaggeration, is one of the best businesses in America.
The divergence among Disney’s various divisions has caused DIS stock to trade sideways, and left multiples reasonably low. DIS stock trades at less than 16x FY19 consensus EPS estimates. I’ve long thought that multiple was appropriate given pressures on half the business. So far, the market has agreed.
But the story is changing this year. The rollout of Disney+, the company’s new streaming service, should arrive in late 2019. The success – or failure – of that initiative will determine where Disney stock goes from here.
Why Disney+ Matters So Much to DIS Stock
There are two reasons why Disney+ is so important to Disney stock. The first is precisely that the stock has been rangebound for years. DIS needs a catalyst, and one is unlikely to arrive from the existing business. Cord-cutting will continue to pressure ESPN, along with smaller properties ABC and Freeform. Cable operators like Comcast (NASDAQ:CMCSA) pay ESPN $9-plus per month per subscriber; Disney simply can’t make all of that revenue back even with its ESPN streaming option.
The Consumer Products business is unlikely to grow much, if it rebounds at all. Parks profits should grow as long as the economy cooperates. But, at barely a quarter of overall profits, it can’t, on its own, move Disney earnings higher.
It’s worth wondering for just how long the superhero/franchise trend will drive moviegoers to the theaters, and keep pushing Disney’s studio revenues and profits higher.
Even at 15x-plus earnings, the existing business doesn’t seem to have enough to drive the type of growth needed for big upside in DIS stock. The bull case for Disney stock relies significantly on the streaming initiative.
Secondly, streaming matters because the opportunity is so huge. Disney+ obviously will be trying to take on Netflix (NASDAQ:NFLX), the leader in the space. That company has an enterprise value of $160 billion. If Disney can add the incremental value of even one-quarter that Netflix created it would add about 20% to the price of DIS stock.
That would finally move DIS to all-time highs.
Will Disney+ Drive Disney Stock Higher?
Will Disney+ succeed? It’s an intriguing question. Matthew Ball, one of the best analysts in the media space, tackled this issue last month. And as skeptical as I’ve been toward DIS, Ball, as usual makes some great points:
Ball cites nine reasons why the platform will succeed. He highlights some of the obvious points: Disney’s huge library of intellectual property, its valuable (and well-known) brand, and the 35 million U.S. households with children. All suggest a Disney+ service should have instant credibility in a way that rivals like AT&T (NYSE:T), Comcast and even Apple (NASDAQ:AAPL) will not.
On the one hand, Ball also wisely highlights some of the concerns. Most notably, Disney is foregoing near-term profits. That’s not something all services have been willing to do. AT&T, for instance, took $100 million from Netflix to keep licensing Friends instead of pulling it to its WarnerMedia-branded service.
On the other hand, Netflix’s notorious cash burn is coming because that company chooses to own, rather than lease, its content. But it’s worth noting that Disney is going to lose other revenue as well. Some $2.6 billion in home video revenue will likely take a hit. As Ball points out, consumers may not pay $25 or $30 for a Blu-Ray copy of a Marvel hit if the film will be available in perpetuity for $5.99 or $9.99 a month.
The biggest risk Ball cites is that Disney is late. Netflix has a potentially insurmountable lead. And by early 2020, when Disney+ is ramping, the competitive landscape will be crowded to the point of congestion. Even if Disney+ can create a business that is a clear second-place to Netflix, it may take years to do so.
DIS: Challenges and Opportunities
From here, it’s far too early to get too excited about Disney stock. Real results from Disney+ likely won’t arrive until early next year, with the company’s fiscal first-quarter report. Even those results won’t clarify the story or prove that the service will be successful enough to offset its costs.
And so I continue to believe that DIS stock will stay stuck, potentially for a long time to come. But I’ll grant that reasonable investors can see it differently. For anyone who sees Disney+ as a slam dunk, DIS stock very well might be a screaming buy right now.
As of this writing, Vince Martin has no positions in any securities mentioned.