The case for Walt Disney Co. (NYSE: DIS ) in the age of streaming is based on the value of its library.
Disney is a great librarian and has been able to sell its slate of movies to the same customers repeatedly for decades. It sold them on TV, then it sold them to cable. It sold them as tapes, then it sold them as DVDs.
Now it's trying to sell them as a service, and its investment thesis as a viable alternative to Netflix Inc. (NASDAQ: NFLX ) is based on the value of the library. It's the library that is supposed to make the streaming service viable, that and some tent pole movies-Marvel and Star Wars-for which it might win pay per view pricing.
If you believe this is a winning formula, then Disney stock is a bargain at a market-matching 17.4 times earnings. But that is speculative.
The Bear Case
What if the library isn't enough to win a mass audience? Netflix' success would argue that it isn't.
People don't buy Netflix, and keep buying it despite repeated price increases, mainly for its library. They buy so they can binge on new shows, or new seasons of existing shows.
Disney's announcement that it would pull its library from Netflix had no impact on Netflix' business, as seen in its third quarter report. That company continues to see revenue growing 10% per quarter with expanding margins.
Disney, meanwhile, is due to release its third-quarter-earnings Nov. 9, with analysts expecting $1.16 per share on revenue of $13.14 billion. That would represent no revenue growth and only slightly more earnings, compared with a year ago.
Since announcing it would commit to streaming on August 8, Disney stock is down 8%, while its press shop is busy telling anyone who will listen how Disney is now a tech company.
It is not. Not yet, anyway. Disney's worst-performing unit is its consumer products, which should include video games based on its movie titles. Unfortunately, that part of the company thinks it's in the toy business, and the toy business is tanking. Our Vince Martin summed up the case for the bears in mid-October.
The Bull Case
The bull case for Disney assumes it can turn around its business with storytelling.
Shows like The Good Doctor are supposed to fix the TV network. More modern storytelling is supposed to fix the cable networks. Tent pole movies are supposed to fix the box office - Disney has 16% of the industry's box office on just five pictures so far in 2017. Warren Buffett's confidence is supposed to fix the stock.
Until we know how its streaming operation will go, its parks and resort business, the only division that showed growth in its most recent quarter , is going to have to pick up the slack. Parks income is up 17% for the year so far, and Disney continues to invest in things like Toy Story Land and Pixar Pier.
Attractions and safe vacations are Disney's bridge into 2018. Resorts now make up 31% of the whole business. Will Healy offers a good summary of the bull case.
The Bottom Line
Disney will rise and fall on its ability to substitute streaming revenue for its cable income. ESPN alone will cost every cable subscriber $8.37 per month next year, which should help accelerate the move to streaming.
A company you once bought on the assumption of stability is now a company you buy on belief. There is no longer such a thing as "free" profits at Disney
Until I have more visibility on streaming I can only recommend this stock to speculators.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time , available now at the Amazon Kindle store. Write him at email@example.com follow him on Twitter at @danablankenhorn . As of this writing he owned no shares in companies mentioned in this article.
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