Bull Vs Bear: Walt Disney Co (DIS)

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Walt Disney Co (NYSE:DIS) has had a bear sentiment since the company indicated the loss of subscribers in its ESPN channel. In the last three-months alone, the stock shed 20% and is more or less in the oversold category. If any investor takes a close look at the company, it is well established that its revenue was well diversified and does not depend on any single brand. Also, it appears that the company could offer the same Internet video service making use of its wide library of videos. In a nutshell, the ESPN’s subscriber loss, though a worrying factor is still manageable and can be overcome with contribution from other segments. Let’s look at bull versus bear case for this stock to see which side has greater weight.

Bull Side

Impressive Revenue from Star Wars

One of the areas from where Walt Disney Co (NYSE:DIS) will gain was Star Wars. The box office revenue was impressive. Reports suggested that even after more than a month, more than 75% of theaters were full in afternoon showings. The Star Wars franchise is considered a big win for the firm. The Force Awakens is said to be doing well in the US though the same cannot be said in China. The film is said to be one of the top three biggest grossers of all time and should be in a position to provide some solid numbers in the first quarter.

In the current year, Walt Disney Co (NYSE:DIS) is planning to release 13 films. That included The Jungle Book from director Jon Favreau, Marvel’s Captain America: Civil War, and the Star Wars spinoff Rogue One. There are already reports suggesting that the next Star Wars movie would be a bigger hit than the Force Awakens. The diversified entertainment firm  also generates revenue from licensing for the performance of its Star Wars Classic, Avengers, and Frozen. In fact, that was one of the factors that helped to post increased operating income in its consumer products segment.

Diverse Nature Of Business Means Nothing To Worry

The biggest advantage for Walt Disney Co (NYSE:DIS) is its diverse nature of the business and that it should compensate any weakness witnessed in the other segment. The company has five segments, Media Networks, Parks and Resorts, Studio Entertainment, Consumer Products, and Interactive. For the year ended October 2015, the company reported overall revenue growth of 7% to $52.465 billion driven by Media Networks, Parks and Resorts and Consumer products. The Interactive segment was the lone segment that witnessed a downtick of 10% whereas Studio Entertainment recorded 1% growth.

Looking at the percentage of contributions to Walt Disney Co (NYSE:DIS), Media Networks is the biggest contributor with 44.3% followed by Parks and Resorts by 30.8%. Its Studio Entertainment accounted for 14.04%, while Consumer products represented 8.58% and Interactive accounted for 2.24%. Significantly, media networks contribution increased by one percentage point compared to the preceding year while parks and resorts contribution remained at the same level. Similarly, consumer products contribution to overall revenue increased by 42 basis points over the preceding year. These three segments growth more than offset the weaknesses witnessed in Studio Entertainment, as well as, Interactive. This advantage will continue to help manage the weaknesses in the coming years too.

Monetization Through Characters

Another area of focus for Walt Disney Co (NYSE:DIS) was the monetization of characters. It is a fact that sometime characters of few movies or shows become accustomed to some brands. Monetization of the characters portrayed in different films of Star Wars could add to the source of its revenue. The company has either begun or is keen to monetize beloved characters such as Iron Man, the Robot Droid from the Star Wars film, and Elsa from Frozen. Such moves could be recurring rather than a one-time affair though it depends on the agreements. In any case, it is an additional source of revenue to offset the weakness of ESPN.

Digital Distribution Deal With Tencent’s Myriad

A few days ago, Walt Disney Co (NYSE:DIS)’s ESPN struck a deal with Tencents, an Internet giant in China, enabling the sports channel a broad exposure in the China market. The deal covers Basketball X Games and the International Soccer coverage. Interestingly, sports are on the rise in Chinese market. Also, the agreement allows localization, as well as, integration of its subsidiary’s popular sports content in myriad digital platforms, as well as, services. The agreement provided enough space for ESPN in QQ sports portal of Tencent from where ESPN’s live, as well as, recorded sports coverage would be distributed to streaming video platforms. That apart, it would cover QQ messaging services, which has more than 650 million monthly active users, and WeChat. The agreement clearly suggested that it was mindful of addressing the subscribers’ loss issue.

Bear Case

ESPN subscribers Is a Cause of Worry

If at all there was any worry, it would only be Walt Disney Co (NYSE:DIS)’s ESPN subscribers growth. The company admitted during the earnings conference calls that it was losing subscribers in the sports channel. In the last two years, it was reported to have lost seven million subscribers. As a result, most analysts have started reducing their price target citing ESPN as the biggest worry as the sports channel showed the exit door to 300 employees. Investors have also failed to notice other favorable factors and started hammering it,  dragging the stock down by 26% to a low of $90. Currently, it trades just 6% above the yearly low price.

Conclusion

If ESPN is the main worry for Walt Disney Co (NYSE:DIS) investors, then it should start receding. Though the company might see pressures in the near-term, ESPN’s President indicated that there would be more content available online. Its recent agreement with Tencents also makes it clear that it wants to expand in online content. This will ensure that advertisers stay with them to generate revenue. Therefore, even the perceived weakness could remain only for a shorter duration as it will move towards online content slowly but steadily. In effect, the company may be able to shake bear perceptions when it shows it can survive this new climate.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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