The Walt Disney Co. (DIS, Financial) has proven itself to be a master of crafting profitable and enthralling entertainment across every medium. So far, the House of Mouse has not given the market any reason to think its latest frontier, streaming, will be any exception.
The big question now is not so much a matter of whether Disney can become a dominant player in the streaming space, but rather one of how it can best tackle the transition. Fundamentally, Disney is in the early days of a process of self-disruption.
Short-term costs for long-term gains
Disrupting your own business model can be a challenging task for any company to tackle, even one as venerable, experienced and well-heeled as Disney. But growing pains are to be expected for a company heavily investing in new products and services, especially streaming. Andrew Freedman of Hedgeye Research pointed this out in the wake of Disney’s August earnings announcement:
“[This] quarter [is a] great case study in the cost of disrupting your own business. No one likes incremental losses near-term, but expect to pay off in the long-term.”
Disney fell short of market expectations, with blockbuster summer releases failing to translate into blockbuster earnings. That is the price of self-disruption, one that appears to be well worth paying. Freedman articulated this long-term outlook in another report published ahead of Disney’s most recent earnings::
“I really like [Disney]. I like the story. I like the OTT [over-the-top streaming] angle. Disney still has a large-portfolio of cable and broadcast networks. They’ll be able to capture a lot of lost subs through their DTC [direct-to-consumer] offering and still generate a lot of revenue off of that. So I don’t think it’s going to be as dire as some people think it will be. I think it’s going to be much more manageable.”
In essence, Disney is altering its relationship with many consumers in very fundamental ways. The transition to streaming is not merely a technical issue, but one of investing in a long-term strategy that will ultimately be profitable for Disney.
Playing a long game
Unlike most companies playing in a fast-paced industry, Disney has the luxury of playing the long game, as world-renowned demographer Neil Howe recently observed:
“Disney is the Coca-Cola of media brands. It’s iconic. You interview millennials who are just starting to have kids, and they all swear by Disney because that was their experience.”
Most companies would kill for the sort of generational support Disney enjoys. The company has a sprawling, profitable and intellectual property-rich entertainment empire to lean on in order to buttress its expansion into this still-emerging medium.
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Disney also has massive cash reserves and access to significantly greater liquidity should the need or desire arise, as evidenced by its latest investment-grade debt offering. However, the company is still not in the business of losing money. At least, not without good reason.
Disney’s long-term strategy could result in rich rewards in the medium-term, provided the company executes to plan. Indeed, Morgan Stanley (MS, Financial) even thinks Disney could double its earnings by 2024Â thanks to durable content and monetization of its Disney+ content streaming platform:
“For all the complexities of Disney’s business model transition and the stock’s investment case, the durability of its content underpins everything.”
Value, growth or both?
Disney is in the midst of a major transition as a company. The big play on streaming will likely have a major impact on the company’s long-term trajectory. It is also having a potent effect on Disney’s market-facing narrative, as Ben Hunt of Epsilon Theory has discussed:
“Disney is creating a powerful narrative that it will take market share. Because Disney is creating Common Knowledge that it will dominate streaming. Because Disney wants you to know that everyone else knows that it is now a Growth Stock...In other words, by saying ‘we don’t care about how much money we make on this right now,’ Disney is reframing the discussion about the potential of this business to be limitless.”
In other words, Disney is a value stock with remarkable growth potential, both in real and narrative terms. That can make it a hard stock to analyze. An investment professional and CFA charterholder who goes by the name Keubiko online, opined on the potential consequences of Disney’s strange duality last month:
“One of the problems I have with[Disney] is the diverse and churning shareholder base. Safety and quality bros think staying in the stock is a way to ride dirty on a growth name that won’t drop 30% on a missed quarter. But not sure it’s enough sizzle for growth at all cost bros.”
Clearly, Disney is in an odd place right now.
Verdict
Disney’s enduring status as a profitable business with an enviable store of intellectual properties that amount to a remarkable (almost alarming) proportion of the world’s most beloved stories combines with its move into the hot and exciting world of streaming video to produce a rather unusual chimera of a stock.
There will be challenges for the House of Mouse as it attempts to thread the needle of disrupting its own business model, while at the same time remaining the dynamic (and profitable) engine at the heart of global pop culture.
Disclosure: Author is long Disney.Â
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