Disney (DIS) stock cannot seem to catch a bid at present.
The share price is $93.71 which means we are down almost 11% year to date. When a quality stock like Disney falls like this, we invariably see analysis going into detail about the risks associated with the stock. If there was one lesson I would like to get across in my writing, it would be this: Buy when you are fearful and sell when you are greedy.
Disney is expected to bring in $5.79 in earnings per share on top of $56.2 billion in revenue this year. In 2015 for example, the company brought in $5.15 in earnings and $52.47 billion in revenue – much lower numbers. However, the share price got to $120 last year – a 22% premium over today's share price.
To make a long story short, Disney is a strong buy at these levels. Its 10-year fundamentals, valuation and increasing gross margins all look extremely attractive to me. Let's look where bears are missing the argument and why Disney should be part of your portfolio going forward.
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The BAMtech deal gives Disney options with its ESPN content
Obviously the elephant in the room is ESPN, which is experiencing declining numbers of subscribers. The subscriber number definitely is what the market is going by; although advertising revenue was up in this segment, the stock still sold off after the company's third-quarter earnings were announced.
Whereas bulls would have taken the recent BAMtech investment as a positive, bears would have stated it is a sign of things to come as the cord-cutting churn continues. BAMtech definitely has the technology (especially for mobile live streaming) and distribution channels to increase the number of viewers watching ESPN content, but will it be enough? These new "multisport" streaming services (of which ESPN will be a part) will still be sought after by avid sports fans. More distribution channels has to work in its favor for this content over the long term.
Sports rights cannot keep increasing exponentially
In an age when pirate media has grown over the past few years, bears are stating it will grow even more due to the plethora of content that will be available online. Twitter (TWTR, Financial) has announced its live stream services and will be one of the many social networks that will be immersed in this space within no time. Will the new live streaming content open up new doors for pirate media? I do not think so. Why? Because the companies selling the rights will have more to lose than the providers themselves.
Yes, the right companies know that the future will be digital streaming. That is why you see the NFL experimenting with Twitter with its most recent deal. You are going to see a lot of this before 2021 regarding NFL rights. That is when the rights auctions come up again for long-term contracts. Twitter was actually lucky to the extent that it would be serving or controlling the majority of the ads compared to some of the TV stations. That is why Twitter got the Thursday night games so cheap.
It is a testing ground, but the social media platform could be frozen out here quickly if the rights companies decide this is not the route to take.
With regard to ESPN, brand awareness will remain critical. Disney wants the network to always be the one-stop shop for sports fans regardless of how the content is distributed.
Bears state that the problem with streaming live sports events will be the cost of the rights. Sports rights have increased meaningfully over the past few years and if this continues, the cord cutting will probably intensify. But again, we are back to the same argument. It is all about supply and demand. If rights get too expensive, you are only going to increase piracy potential because of too few takers, and this is something that is most definitely not wanted in the industry.
You have to back Disney with its piracy efforts going forward
The studio segment grew by a whopping 40% in the third quarter. Furthermore, Studio's EBITDA grew by 58%, which illustrates the profitability of the sector. Now bearish analysis has again centered around the piracy standpoint, which in theory would have detrimental effects on its business. You see Disney is all about supplying media and getting its customers to pay top dollar for that media. Will Disney be able to control its content in a future with more advanced technology? It probably will, but the jury is still out.
Another risk posed in this area is the competition argument. Disney rules the roost when it comes to superhero and animated films. The company now –Â through its Pixar, Marvel and Lucasfilm studios to name but a few –Â is dominating in this area at present despite the best efforts from well-known competitors such as Sony (SNE, Financial) and Twenty-First Century Fox (FOX, Financial). However, this industry is cyclical and customers' tastes can change on a whim. The encouraging aspect at present is that Disney seems to have won the trust of parents, which is why we saw record attendance for many of its films this year. Furthermore, whereas the fourth quarter is expected to be soft for studios' revenue, 2017 is expected to be another bumper year with films such as "Rogue One" and "Beauty and the Beast" expected to perform well.
Viewership on popular trailers indicate more blockbusters on the way
Bears will state there is too much growth priced in and since the company's studios are at full throttle, there is much Disney could do if competition started to make inroads. Again the bears have it wrong here. Just look at the viewership numbers for the likes of the "Rogue One" trailer. Demand is here for Disney's productions in 2017, and it is not going to go away overnight.
Takeaway
To sum up, the cyclical nature of the studio business along with ESPN concerns have the bears stating this stock is going lower. However Disney is still reporting impressive numbers every quarter. Its price to earnings ratio will eventually bottom out which would be a great buying opportunity.
Disclosure:Â As of the time of this writing, the author held no position in any of the stocks mentioned.
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