So far this year, the stock market has been on a tear, but there are a few stock who have earned special rocket-ship rides. Disney (NYSE:DIS) stock came into its earnings report up 23% year to date, which is 50% more than the S&P 500. They have had a banner year, making major acquisitions and announcements to better situate them smack dab in the middle of the streaming wars.
Netflix (NASDAQ:NFLX) proved that the concept is viable. Thanks to its efforts, we now know that the world wants to cut the cord and stream its content online. This is a trend that will not reverse, so Disney is adapting rather than risk getting left behind and Wall Street realizes this, hence the recent mega celebration in its stock price action.
I equate this industry shift to the one that happened for in the tech world. Those companies like Microsoft (NASDAQ:MSFT) and Adobe (NASDAQ:ADBE) that adopted to the subscription model early enough reaped the rewards on Wall Street. Disney is doing now what MSFT did under the Satya Nadella’s reign, which is to adapt and thrive.
DIS Stock and the Long-Term Plan
For DIS to accomplish this is not easy or cheap. The operational costs alone are massive, and once you add to that their acquisitions of critical assets, the bills is humongous. But they did receive gems like their stake in Hulu which is instant online presence completely additive to their future offerings.
Costs are worrisome, especially since we know that Netflix spends 18 billion per year on content. However, therein lies the Disney advantage — they already own massive libraries. The demand for their content spans the globe. There are few people on the planet who don’t know the house of mouse. As for future content, Disney can produce its streams much cheaper than NFLX, so it can compete on thinner margins to gain share.
Disney stock has healthy fundamentals. It sells at an 18 price to earnings ratio so it’s not bloated. But I caution buying it up here even after a strong earnings report.
Management beat expectations on all metrics. This includes sales, earnings, parks and products. It is important to note that the studios delivered higher operating income than forecast and perhaps this is a good omen to the streaming strategy. Bob Iger announced that the latest Avengers movie will stream on Disney+ starting Dec. 11. So I am not yet sure if this is a headline for the movie or the launch date of the streaming platform yet.
There were some disappointments in the media networks with lower cable & broadcasting income and an increase in costs and a decrease in ad revenues. Nevertheless this was a strong report with no causes for concerns.
What Should You Do About Disney Stock?
Now for the important question: Is DIS stock a conviction buy here?
Yes, I am confident that the company is making all the right moves. However, I am concerned that the investors have already more than priced in the upside, especially after the $15 spike in April. From here I bet that there are too many weak hands below. At the first sign of trouble, these folks will hit the sell button first then ask questions later.
For the very long term, a few dollars won’t make a big difference, so those investors should just buy it now. But for the rest of us who prefer to find smart zones to enter trades, there are levels to know for the mid term.
If DIS loses $132 per share then it would trigger a bearish program to target $127.50. Then if that level breaks, it could fill the massive gap to $118 per share. It is important to note that this is not a forecast but it is a reasonable scenario especially that the whole market is in jeopardy this week from the China headlines and deadlines. Disney will not likely rally all by itself if the S&P 500 is correcting.
To the upside, if the bulls can break through $138 per share, they can then work on setting new all-time highs. I don’t like to chase a stock after such a big run with conviction. If I don’t already own the shares, I’d consider myself having missed it for now and I would wait for a better entry point.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.