Shares of Disney (NYSE:DIS) initially popped and then dropped after the media giant reported stellar second-quarter numbers that topped expectations across the board, and broadly confirmed that 2019 is on track to be a record year for the company.
If the results were so stellar, why did DIS stock drop in response? Broader concerns related to rising trade tensions between the U.S. and China, which have ultimately weighed on the entire market. DIS stock hasn’t been immune to this broad market sell-off. The market sell-off continued on Thursday. So did the sell-off in DIS stock.
To be sure, Disney does have wide exposure to China through its theme park and studio businesses. But these second-quarter numbers were simply too good to ignore, and they broadly confirm the long-term bull thesis for DIS stock. Ultimately, assuming the trade war doesn’t get much uglier, that long-term bull thesis will power Disney stock meaningfully higher in 2019.
Taking a closer look, the long-term bull thesis breaks down into three parts, and as such, there are three reasons to buy DIS stock in 2019. Those three reasons are as follows:
Direct-to-Consumer Launches Will Offset Cord-Cutting Weakness
Over the past several years, the whole narrative at Disney has been dominated by cord cutting. Specifically, this company has historically made a killing through cable and broadcasting revenues. But, as consumers have increasingly cut the cord and shifted to DTC offerings over the past few years, Disney’s Media Networks business — which is the company’s largest business — has suffered.
That’s why DIS stock hasn’t gone anywhere in several years.
In early 2019, though, DIS stock has broken out of its slump amid a massive pivot to the DTC arena. Q2 numbers illustrate the strength of this picot. DTC revenues rose 15% in the quarter. Importantly, Media Networks revenues were flat, so the DTC business gained traction without the Media Networks business losing any traction.
That’s huge. It basically says that Disney can become a huge DTC player without entirely sacrificing its traditional media business. Consequently, as the DTC pivot accelerates for the rest of 2019, investors will turn their attention from cord-cutting losses, to DTC sub adds — and that sentiment shift will push DIS stock higher.
Multiple Catalysts Imply a Record Year for Parks & Studio
DTC expansion isn’t the only place where Disney is being aggressive in 2019. The company is also set to launch multiple theme park expansions and multiple blockbuster movies this year, the sum of which should provide big tailwinds for the Parks and Studio businesses.
On the Parks side, you have three major expansions coming in 2019. First, in mid-May, the company will break ground on multiple new additions to Tokyo DisneySea. Second, in late May, Star Wars-themed Galaxy’s Edge will open at Disneyland. Third, in August, Disney World will unveil its own Galaxy’s Edge expansion.
Meanwhile, on the Studio side, you have four big new movies coming up in 2019, on top of the already huge success of Avengers: Endgame. First, you have a highly anticipated live-action remake of Lion King. After that, you’ll get Frozen 2, Toy Story 4, and the final Star Wars movie in this trilogy.
Overall, then, there are multiple catalysts on the horizon, which imply that the Parks and Studio businesses will put up record numbers this year. As they do, DIS stock should trend higher.
21st Century Fox Assets Will Create Huge Tailwinds
The last reason to buy Disney stock in 2019 is that the company just closed its acquisition of entertainment assets from 21st Century Fox, and these assets give Disney ample firepower to continue to expand its multiple business verticals over the next several years.
For example, thanks to the acquisition, Disney now owns National Geographic. The synergies between National Geographic and Disney’s ecosystem are numerous. The company can add National Geographic merchandise to its retail business, expand its theme parks with National Geographic rides, and buff out its streaming service with National Geographic content. This goes for essentially every entertainment asset Disney picked up from Fox.
In fact, Disney is only scratching the surface of what it can do with Fox entertainment assets. Over the course of 2019, the market will gain more visibility into how those assets will generate more profits for Disney in the long run, and that enhanced clarity will lift DIS stock.
Bottom Line on DIS Stock
2019 is the year Disney stock breaks out of its multi-year slump, and gets back to its winning ways. Buying the stock in the middle of that fundamental transition seems like a smart idea.
As of this writing, Luke Lango was long DIS.
