- Piracy in emerging markets such as China could prove to be a hindrance for Walt Disney.
- People could tire of Walt Disney’s constant barrage of Marvel and Star Wars content.
- Sports organizations could cut the cord with ESPN.
Entertainment conglomerate Walt Disney (NYSE:DIS) has a great deal going for it, which makes it an attractive stock. First and foremost, Walt Disney’s best strength resides in its powerful content portfolio and its multiple means of distribution, including motion pictures, theme parks, cruise lines, cable networks, etc. This strength translated into huge fundamental expansion for Walt Disney and superior returns for its shareholders. Over the past five years, Walt Disney stock has expanded 204% versus 71% for the S&P 500 (see chart below). However, there are some risks that Walt Disney investors should consider. Let’s examine.
Disney stock price chart by amigobulls.com
The Changing Landscape Of Entertainment
Emerging markets such as China, with large populations and a growing middle class, represent a huge opportunity for multinational companies like Walt Disney. As an example, in Walt Disney’s Q3 FY 2015 earnings call, an analyst expressed concerns about streaming technology changing the way people consume movies. Walt Disney’s CEO talked about motion picture consumption actually increasing on a global scale. Specifically, he indicated a “massive increase in movie-going over the last two to three years” in China. Walt Disney executives are also highly enthusiastic about a Shanghai Disneyland theme park.
However, as a counterbalance, the theft of intellectual property and piracy represent hindrances to the home video market. Thieves could video record these shows along with motion pictures and television programming and sell them without compensation to Walt Disney. Furthermore, waning economic growth in China could lessen the potential of this market.
Walt Disney inherited a huge universe of fictional characters when it bought Marvel in 2009, giving it a huge opportunity for creating one blockbuster after another. LucasFilm also owns properties that could create blockbuster movies, TV shows and theme park experiences. However, consumers could actually tire of seeing one sci-fi film after another. Right now, everywhere you look you see the Star Wars movie associated with everything from Campbell Soup (NYSE:CPB) soup to HP INC (NYSE:HPQ) printers. Also, if the writers hit a creative brick wall and start putting out flops, Walt Disney’s stock price will flat line. Of course, Walt Disney’s diversity and depth will help counteract this. For example, if people tire of Star Wars, Walt Disney can put out Indiana Jones films or create new sagas altogether.
Sports Cutting The ESPN Cord
The financial media is shouting “run for the hills” over cord cutting. The fears aren’t entirely unjustified. Walt Disney’s ESPN has been losing subscribers over the past two years. People increasingly consume content via streaming services and other options that give them more control over their choices. People can choose to subscribe to ESPN as part of other streaming packages. My biggest concern for ESPN is that Walt Disney doesn’t originate sports content. ESPN possesses license agreements to produce sports content through the next decade.
What’s to keep major sports organizations such as the NFL, NBA and Major League Baseball from utilizing technology to stream their own content without ESPN? Walt Disney’s management believes the key to transitioning any potential technological upheaval hinges on producing high quality content that people will enjoy and consume through any media conduit.
While these concerns are worth investors’ attention, Walt Disney possesses the depth and diversity to survive. Content quality will help set Walt Disney apart in an increasingly commoditized world. The company has demonstrated adaptability over the long-term and should be able to overcome technological disruptions. Moreover, Walt Disney stock still remains reasonably priced at 23 times earnings. Investors should feel comfortable owning shares in this company over the long-term.