- Disney stock has buckled under ESPN's declining subscriber numbers.
- Star Wars can provide long term stability.
- Disney's financials puts them ahead of competitors on key metrics.
Recently named the world's most powerful brand, Walt Disney (NYSE:DIS) is showing no signs of releasing its grip on its merchandise, media, and live attractions business. Recent news about declining ESPN subscriber figures caused Disney stock price to buckle over fears that this would cause a hit to Disney's long term growth. In fact, Disney's stock price is down by approximately 20% as compared to its peak of $121.69 on August 4th of 2015. Amidst the hype surrounding the then impending Star Wars release, Disney's stock price gained an astounding 33.3% between January and August of 2015.
There is some anxiety among the investment community about just how much can Disney leverage the success of Star Wars, and whether they can continue to grow other parts of their vast empire.
ESPN subscriber decline a cause for concern
Despite the fact that Walt Disney (NYSE:DIS) generates profits from five main segments, its 'Media Networks' arm is responsible for approximately 50% of profit. As a result, the news that a significant percentage of ESPN subscribers were leaving to streaming services such as Hulu and Netflix, was something that investors paid particular attention to. Plus with Netflix (NASDAQ:NFLX) increasing the amount of their original content, it isn't far-fetched to think that this trend will continue into the future. Also, increasing broadband access and speed also goes against ESPN.
Despite the fact that ESPN lost 3 million subscribers between October 2014, and October 2015, I don't view this as a big deal. Before you label me as crazy, let me explain. I would be very surprised if Disney hasn't already created a robust contingency plan in the event of an increase in the rate at which subscribers leave ESPN. However, in an industry where more is usually deemed as better, Disney needs to create a more compelling rival product to Netflix or risk being left far behind.
Star Wars will provide long term boost
It was so crucial for "Star Wars: The Force Awakens" to perform exceptionally at the box office. And in this regard, it exceeded expectations. The film is on track to reach $2 billion in global box office revenue in a week from now. This isn't what is getting investors really excited. The fact is that the success of the latest release will get more people into Disney's Parks once they create rides based around the film. Moreover, it is likely to trigger a boost to merchandise sales. Additionally, the success of Disney's first attempt at creating a Star Wars film should reduce the budget required to promote the next release, and also fuel growth in other areas of the business.
During an interview with the BBC, Disney's CEO, Bob Iger, confirmed that there will be "four more films" for Star Wars fans. This provides a huge opportunity for Disney to release new rides, merchandise, and 'milk' the franchise for all it is worth. Plus, with Star Wars fans spanning a wide demographic, there really is no limit to how much revenue they can make off the back of these huge successes at the box office.
The reasons why Disney remains one of the most-loved companies by investors and analysts goes beyond the fact that it played a role in our childhoods. Since its IPO in 1978, the company continues to produce solid results.
Firstly, Disney's revenue growth currently stands at 9.1% as compared to the same quarter in 2015, well above the industry average of 6.3%. Consequently, this triggered a significant 10.5% boost to the EPS as compared to the same quarter last year. Plus, investors can expect Disney's revenue growth to continue or at least stabilize. This leaves the conglomerate as a wise long-term investment. Secondly, Disney's stock price outpaces the S&P 500 with regard to growth.
When we consider that competition is heating up in the media space, it is impressive that Disney continues to not only stand its ground, but move head-and-shoulders above their competitors.
It is worth noting that over the past 30 years, Disney has shown a solid trend of revenue growth. If that doesn't indicate consistency, I don't know what will.
Taking all things into account Disney stock is a bargain at its current price. This is a stable company with a fat cash cow in the shape of a lucrative Star Wars franchise. Plus, they are well diversified with revenue coming from five different segments. As a result, risk is spread, and investors can expect stable returns.
Netflix is a big competitor but if there is anyone who can go toe-to-toe with them on great content, it is Disney. Disney's next earnings report is set to drop on February 9th. I am going to make a bold prediction that it will be better than people expect and the long term outlook of the company will be favorable. As a result, Disney stock price will increase significantly.