Disney Stock Analysis: ESPN Fears Are Overdone

  • Disney lost 7 million ESPN subscribers over the last two years.
  • Disney still has 92 million ESPN subscribers.
  • Disney stock has abundant growth catalysts, including Star Wars and Shanghai Disney just next month.

As covered in an earlier post on Amigobulls, the ESPN channels of the Walt Disney Company (NYSE:DIS) have lost 7 million subscribers in the last two years. 

This is seen as a reason to panic. After all, ESPN costs about $8.38 per month. Multiply that by 12 months, and you get a loss of $700 million per year to the entertainment company.

The problem, for the bears, is that Disney had sales last year of $52 billion. That includes 92 million ESPN subscribers. That $700 million figure is practically a rounding error. And the new Star Wars movie, due out in less than a month from now, could deliver far more than that in revenue, and earnings.

The fact is, this is not a “life threatening” subscriber bleed. This is just what is happening in the cable industry. Consumers are “cutting the cord,” buying Internet subscriptions of shows they want to watch rather than paying up to $200/month for a lot of shows they don’t want to watch.

In that world, ESPN will do fine. The company already offers streaming to devices under the Watch ESPN brand. When a consumer buys Internet service from most major cable companies, they are charged for this service, even if they don’t use it. This is how cable, and Disney, will deal with the cord-cutters, by simply charging for content on a per-channel basis.

Even while ESPN has been suffering these “life threatening” subscriber losses, the company as a whole has been going from strength to strength. Revenues have risen about 10% in the last two years, and margins are at about 25% of revenue. Disney has generated $10 billion in operating cash flows for each of the last three years.

Disney is also taking the ESPN streaming model to its other offerings, offering DisneyLife in England, and probably soon in the U.S. as well. Disney is a partner in Hulu, a streaming service that competes directly with Netflix (NASDAQ:NFLX), and now offers its ABC shows on the platform.

Unlike some cable operators, like Discovery Comm. -A (NASDAQ:DISCA) and Viacom -B (NASDAQ:VIAB), Disney doesn’t have a lot of “loser” channels that mainly survive because they’re part of a cable bundle. Each of its offerings aim at a specific demographic and can stand on its own, within a streaming universe. Disney also has a host of other operations -- the studios, the theme parks, and the cruise line – to pick up the slack. Shanghai Disney, in which it holds a 43% stake, opens next month.

So when these outbreaks of panic hit, it’s a buying opportunity. I have been accumulating Disney shares for over a year and have earned about 24% on that position, not including dividends. My guess is you should be able to do the same.

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