Is Disney Stock Trading at a Discount?
Whenever I try to imagine the perfect media business, it ends up looking a lot like Walt Disney Co (NYSE:DIS). Although Disney stock is undervalued at present, investors should ignore the ESPN losses. DIS stock deserves to be soaring in the clouds.
Bob Iger (probably my favorite CEO) has made all the right moves while at the helm of Disney. He’s built the company on equal parts content and technology. Even with ESPN losing subscribers, I’m still enormously bullish on DIS stock.
Iger shows an understanding of the new media landscape that other CEOs lack. He gave us a peek into his thinking at the Vanity Fair conference last October:
“I just really believe, that when it comes to changes that technology is bringing in our businesses, or in story telling for instance, bring it in and use it to your advantage,” said Iger. “You have no real ability to ward it off or fight it.” (Source: “Bob Iger and Marc Andreessen Bridge Hollywood and Silicon Valley,” Vanity Fair, October 8, 2015.)
This mentality is already paying enormous dividends for Disney. And when you look at the ESPN losses through Iger’s prism, they start to look meaningless.
The Future Is Bright for Disney
Disney posted record earnings in the last quarter. It also marked the 10th straight quarter of double-digit earnings-per-share (EPS) growth. Yet the company’s share price fell 3.76% that day, all because ESPN lost three million subscribers. (Source: “The Walt Disney Company Reports Fourth Quarter Earnings,” Walt Disney Co Investor Relations, February 9, 2016.)
Three million is a big number, I’ll grant you that, but it hasn’t materially hurt the company. The simple fact is that a lot of people are abandoning their cable subscriptions altogether. It would be downright strange if that didn’t cost ESPN some viewers.
But that doesn’t mean ESPN has lost its relevancy. Disney is currently in talks with the likes of Apple Inc. and Amazon.com, Inc. Disney plans to offer customers a bundle of channels (including ESPN) through online streaming services, but at a fixed price. (Source: “ESPN in Discussions to Get on Other Streaming Services (Video),” Re/Code, February 17, 2016.)
It’s unclear whether these packages would count toward ESPN’s overall subscriber numbers. Either way, it doesn’t really matter. By ensuring that customers still have to pay for ESPN, Disney is keeping the revenue it supposedly “lost.”
The distribution avenue is different; that’s all. Disney realized that younger customers weren’t fond of cable TV, but they were still willing to pay for live sports. That’s the crucial distinction between Disney and its rivals.
Bob Iger understands that online streaming isn’t a fad; it isn’t going away. He recognizes it as the modern distribution channel, but that doesn’t mean he’ll compromise Disney’s bargaining position. It’s a two-way street.
Distributors like Netflix, Inc., “Amazon Prime,” and Apple are content-hungry. There are more and more technology companies willing to buy content from storytellers like Disney, which translates to huge profits.
The proof is simply in the pudding. In the last year, Disney’s net income skyrocketed by 32%. It only makes sense that DIS stock will follow in due time.