I happened to read a recent article in the Federalist about Disney (NYSE:DIS). It discussed how the opening of the company’s Star Wars Land theme park was indicative of an entertainment company that has veered way off the course set by the company’s founder, Walt Disney, several decades ago.
While there’s no doubt DIS is a much different company than the one Walt ran, the question shareholders ought to be asking themselves is whether the vision of current DIS CEO Bob Iger’s is good for Disney stock.
Despite being a fan of DIS stock, I get where the author of the article, Chris Jacobs, is coming from.
In the 1960s, my grandfather ran Famous Players theaters, a Canadian movie theater chain. It’s now owned by Cineplex (OTC:CPXGF), a company that’s expanded into all kinds of entertainment outside its bread and butter of showing movies.
Cineplex has been forced to find other revenue streams because fewer people are going to the movies these days. If not for rising ticket and concession prices, the company’s average revenue per patron would not be growing.
In the case of DIS, as Jacobs suggests, it’s become very difficult for Iger to maintain a balance between revenue growth and well-received entertainment.
“In his 14-year tenure as CEO, Iger has vastly expanded the Disney company’s empire,” Jacobs stated. “But as the underwhelming launch of Star Wars Land in California indicates, the continual acquisitions may have given the company a case of indigestion, and an identity crisis to boot.”
So, the question isn’t just whether Disney’s growing empire is losing its creativity and innovation, but whether that’s likely to affect Disney stock price over the next two or three years.
Disney’s Expansion Will Hurt Disney Stock
After Disney added Fox, Marvel, Pixar, and Lucas films, it’s becoming harder to define what makes a “Disney” film. As a result, the company’s brand has been diluted, potentially making its parks, resorts, cruise ships, retail shops, etc less attractive
If Disney doesn’t stick to one vision, it risks losing a chunk of its loyal audience. And that would be terrible for Disney stock.
Disney Will Be Fine
It’s important to remember that Disney faced financial difficulties in the early 1980s so great that it became a potential takeover target.
Former Paramount executives Michael Eisner and Jeffrey Katzenberg broadened the company’s movie output to include more R-rated films.
And now, after buying 21st Century Fox’s entertainment assets, R-rated films will become even more commonplace in the Disney movie distribution roster.
Some might view this as blasphemous, given Walt Disney’s dedication to family-friendly fare, but the reality is that people are having fewer kids these days, lowering the demand for G-rated movies.
Furthermore, in a nod to families, Disney’s new streaming service will have a lot of family-friendly content to ensure it still appeals to parents.
Disney is a much different company than the one Walt ran, but it also generates a lot more revenue, profits, and free cash flow than it ever has.
Bob Iger’s legacy will be establishing Disney as the preeminent global entertainment brand. That’s definitely been positive for DIS stock.
The Bottom Line on Disney Stock
Acquisitions often fail to generate the returns CEOs expect. The larger the acquisition, the more disappointing it can be.
It’s too early to know which kind of acquisition Fox will be.
However, DIS better remember to channel its inner “Walt” if it wants to remain relevant to consumers of every age.
If DIS wants to remain unique and not lose its way, it’s got to stick to the founder’s vision.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.