Star Wars Big Boost for DIS Stock
When it comes to the entertainment industry, no company beats The Walt Disney Company (NYSE:DIS), with a product offering so wide and so ubiquitous that it is recognized in every single nook and corner of this planet. Sadly, DIS stock is either being rated a hold or a sell by most street analysts on fears of ESPN’s subscriber growth, despite the recent positive news. Here’s why the bears are wrong on Disney stock.
The biggest news for Disney this week has probably not missed an eye. Disney’s Star Wars Episode VII: The Force Awakens has just raked in more than $238 million during its opening weekend from the U.S. and Canada alone—the biggest ever box office opening for any movie, breaking previous records set by Jurassic World. The global grossing for the two days stood at more than $528 million. And here comes the best part: the movie has not even opened in China yet, where Jurassic World did huge business. (Source: “Box Office: ‘Star Wars’ Passes ‘Jurassic World’ for Biggest Global Debut,” Variety, December 21, 2015.)
Many slammed Bob Iger, Disney’s CEO, with undue criticism when he made the decision to acquire Lucasfilm Ltd. LLC, the production company behind Star Wars, for more than $4.0 billion. The bears couldn’t have been more wrong. The company has managed to cover over 12.5% of the cost in just two days. The Star Wars factor is already proving a boon for the company, but the bears are still barraging Disney stock with bearish commentary over ESPN’s sliding subscriber growth.
ESPN Is Not a threat for Disney Stock
What the bears forget is that even with the slipping subscriptions, ESPN is still the industry leader in live sports. The cable channel has grown beyond just an entertainment source to become a full-fledged brand. In fact, the ESPN brand ranks second in Forbes’ most valuable sports brands, surpassing the likes of Adidas, Reebok, and rival Sky Sports. (Source: “The Forbes Fab 40: The World’s Most Valuable Sports Brands 2015,” Forbes, October 2015.)
Now, the declining subscriber base has largely been a result of cord-cutting by online streaming services like Netflix, “Amazon Prime,” and Hulu. But we must not forget that none of these services offers a direct substitute to ESPN, meaning they don’t offer live streaming or sports broadcasting.
As Disney’s CEO, Bob Iger has been aware of this recent shift in industry dynamics. He understands that the age of online media will eventually make it inevitable for the company to review its business model. Earlier this year, Iger indicated the likelihood of going beyond ESPN’s pay-TV model to offer direct online streaming for ESPN subscribers. (Source: “ESPN will bypass cable for streaming ‘eventually,’ Disney boss says,” MarketWatch, July 27, 2015.)
Making good on his words, he has taken the first step. Only recently, ESPN started offering live streaming on its mobile app. (Source: “ESPN app makes it easier to live-stream games,” CNN Money, December 4, 2015.)
Now, the nominal three million subscribers shaved off this year, compared to last year’s whopping subscriber base of 95 million, don’t worry me much. The good thing is that the company acknowledges the new trend and is already starting to make an effort to adapt to changing consumer tastes.
Online services are often cited as competitors, but bears forget that it is these same streamers who license content from Disney, thus returning a part of the cannibalized profits back to the company. Also, the recent success of the latest Star Wars installment makes me optimistic that the loss from ESPN’s subscriptions will be partially, if not wholly, covered by this side of the business. Remember, Disney doesn’t just own a movie, it owns a phenomenon—one that will keep on paying as the company releases the sequels in the trilogy.
The Bottom Line on DIS Stock
Financially, the company is strong and the stock’s dividend history is nothing less than stellar. Management has consistently stepped up dividend payouts and has kept the dividend stream stable for well over a decade now. The stock has been a promising value play, returning over 185% in the last five years and more than 14% year-to-date.
How I see it, the latest dip in DIS stock marks a good entry point for the long haul.