Buying the rumor, selling the news can have you buying the sizzle and missing the steak. Walt Disney (NYSE:DIS) broke out of its trading range April 11 and is up almost $20 per share since then, closing April 25 at $133.36.
There was no news. The acquisition of parts of 20th Century Fox assets had closed in March.
What caused the run-up was an “Investor Day,” essentially a sales presentation, where Disney executives touted their coming launch of Disney+, a streaming service it will launch in November at $6.99 per month.
This is the second streaming launch by Disney. It follows last year’s ESPN+, a $5-per-month sport service that has since drawn over 2 million customers. That sounds like a great solution to cable cord-cutting, until you realize that ESPN’s cable services draw $9 per month whether people watch or not.
The Math is Tough for DIS Stock
Selling something for $5 per month after losing that business at $9 per month is not usually considered good business.
The assumption of Disney bulls is that, once customers become accustomed to ESPN+ (or Disney+ for that matter) the company will be able to push through price hikes, as Netflix (NASDAQ:NFLX) has done, and that the “direct relationship” with the customer (as opposed to going through a cable “reseller”) will prove enormously profitable.
There are a lot of caveats in that last sentence. As my late mother would say, “If ifs and buts were candy and nuts we’d have a Merry Christmas.”
As industry journal Variety noted last year, the math here is hard. Disney’s entertainment channels draw about $2 per month from cable subscriptions, and those numbers have also been dropping, by 3 million per year. (Disney Channel had 89 million subscribers last year.)
A consumer cutting their cable cord costs Disney about $11 per month, and these numbers are dropping by about 2 million each year. To make up its losses in cable, Disney must get nearly all these customers to buy both its streaming packages. And streaming services also cost money to operate, both in delivering programs and billing customers.
The Disney Debt
Disney is also taking on enormous debt in buying the Fox assets. The total debt figure won’t be available until Disney reports earnings on May 8, where $1.58 per share of net income on $14.58 billion of revenue is expected.
Before the Fox transaction closed, Disney had a debt-to-equity ratio of about 55% and was considered to have above-average leverage. The total cost of the Fox assets is $85 billion, including $13.7 billion in Fox debt.
I’m not arguing that Disney was wrong to go after Fox, or wrong to go into streaming. Stocks in companies that haven’t made moves like this, such as Viacom (NASDAQ:VIAB), CBS (NYSE:CBS) and Discovery Networks (NASDAQ:DISCA), have done just as well as Disney this year only because they’re seen as acquisition targets. Although with Comcast (NASDAQ:CMCSA) and AT&T (NYSE:T) now loaded with debt, as well as Disney, who’s going to buy them? Amazon (NASDAQ:AMZN)? Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL)? Apple (NASDAQ:AAPL)?
Personally if I were Apple CEO Tim Cook, with a market cap of $958 billion, I’d be more likely to buy Disney, with its $234 billion market cap, than any of those others.
The Bottom Line
Netflix has shown that it’s possible to build a scaled, successful streaming business with pricing power. In the first quarter alone, it added 9.6 million subscribers, despite hiking prices. It now has 146.86 million subscribers and expects to add another 5 million in the current quarter.
Meanwhile Disney is bragging about getting 2 million ESPN+ subscribers, and has yet to launch Disney+, while it digests the debt from the Fox deal.
Disney’s big plans may work, but right now they’re just plans. Over the last three months Disney stock is up 22%, Netflix 15%. The numbers tell me that Disney, not Netflix, is the speculative play.
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 shares in AMZN and AAPL.
