Since April, Walt Disney (NYSE:DIS) stock has been all about streaming. Disney stock soared 11.5% when plans for Disney+ were announced, and it kept rising to a new all-time high in late July.
Since then, however, Disney stock has struggled, pulling back some 11%. Fully half the gains created by the launch of Disney+ have dissipated.
The question in the near-term is if DIS stock will give back all of the gains. And there is a case that it will — or, at least, should. Disney+ is an intriguing option but the launch wasn’t a surprise. Old concerns still hang over the company. And near-term earnings will be pressured.
Any such dip might well be an opportunity. I’ve long been relatively skeptical toward Disney stock, but in a detailed piece this summer I argued fair value topped out at $140. DIS stock already sits below those levels — but that doesn’t mean the stock can’t fall even further.
Why DIS Stock Might Fill the Gap
“Filling the gap” is an old — and not always accurate — trading strategy that suggests that a gap in a stock will be filled in either direction. In the case of DIS stock, filling the gap would suggest a return to the $117 level reached before the April disclosure of details surrounding the Disney+ streaming service.
Technically, the case is rather thin. Not all stocks fill the gap. The move, anecdotally, seems more common when stocks gap down — perhaps on an overreaction to news — than up. But fundamentally, the argument seems stronger.
After all, before that April launch, Disney stock had been range-bound for years. At the time, in 2015, its all-time high was $120. The key reason for the sideways trading was concern about the company’s television business, primarily ESPN. The company’s Media Networks segment historically has generated almost half of its profit. Cord-cutting represented a real risk to the affiliate fees Disney generated from ESPN, ABC, and other smaller networks.
And as I noted last month, the third quarter report showed that old worries about the company’s media business persist. Subscribers continue to decline. Advertising revenue is relatively stable, but only due to more ads.
The skeptical case toward DIS stock since April has been that investors are too optimistic about Disney+ — and in the process forgetting about challenges elsewhere in the business. The 11% decline in the last two months, including a post-earnings dip, suggest that investors are starting to remember.
Was Disney+ A Surprise?
Meanwhile, it’s not as if the launch of Disney+ was a surprise. On this site, Luke Lango highlighted the service’s potential back in January.
Yet Disney stock gained over $20 billion in market value in a single day on the news of the launch. The price point — $6.99 — seems logical, admittedly. And management was optimistic toward the opportunity. But it’s at least possible that investor bullishness toward the launch went too far.
After all, Disney+ is going to hit earnings in coming years. The company has pulled content from the likes of Netflix (NASDAQ:NFLX) and foregone high-margin licensing revenue as a result. Even the Home Entertainment business, which still generates almost $2 billion in revenue, likely will take a hit.
As a result, as even CEO Bob Iger has admitted, near-term earnings are going to take a hit. Combine that pressure with any sort of disappointment from Media Networks, and even the current price could well be in the range of 25x fiscal 2020 (or FY21) EPS.
The only way that multiple holds is if investors stay patient in terms of the opportunity from Disney+, which will take time to ramp. That patience already appears to be waning. With the Q4 report coming on Nov. 7, five days before the official streaming launch, that’s not a good thing in terms of near-term trading in DIS.
The Catalyst Problem for Disney Stock
All told, I’d certainly be cautious with DIS stock, at least from a near-term standpoint. There’s still one more earnings report with no contribution from streaming. Analysts already are looking to the 2020 film slate, which will have a brutally tough comparison against a string of 2019 hits. Disney no doubt will give an early update on streaming numbers, likely in December. Those figures will be closely watched.
The good news for DIS stock once the end of the year rolls around is that it’s beating most rivals to the punch. Comcast (NASDAQ:CMCSA) and AT&T (NYSE:T), via its HBO Max service, won’t arrive until 2020. Disney now has nearly full control of Hulu as well. With Netflix nearing saturation in the U.S., and CBS (NYSE:CBS) All Access a much smaller player, Disney will have the market for new customers almost all to itself in the early going.
But there will be a lot of pressure on those early results — and very little room for error. In the meantime, investors seem to be selling the proverbial news. With analyst consensus for FY20 EPS at $5.82, a return to $117 would leave Disney stock priced at almost exactly 20x earnings. In the context of recent declines, and the challenges facing the company outside of streaming, that hardly sounds unrealistic.
As of this writing, Vince Martin has no positions in any securities mentioned.