Walt Disney Co (DIS): Understanding the Long-Term Play

Walt Disney Co (NYSE:DIS) is under pressure amid changing industry dynamics and subscription losses. But the stock is a Buy if you are ready to wait for long term profits. Walt Disney Co (NYSE:DIS) is in a strong position to take the heat of the industry wide slump amid a massive cord cutting spree. Disney and its competitors like Twenty-First Century Fox and Viacom are facing intense pressure and a loss of subscribers as users in the country move away from the traditional cable TV and content services for cheaper and faster digital online TV service. The stock is up over 4% year to date.

Walt Disney Co (NYSE:DIS) is set to announce third quarter results next week, and several analysts suggest that the company will miss analysts’ estimate amid a loss of ESPN subscribers. According to a report by Nielsen, ESPN has a total of 87 million subscribers, significantly lower than over 100 million subscribers it had in 2011. Walt Disney earns a whopping 30% revenue from ESPN. Audience in the US are drifting away from ESPN amid a rise of streaming services and new players like Amazon, which pays hefty price to buy streaming rights for big sports events. Amazon recently paid $50 million to buy streaming rights for 10 games of National Football League.

However, it should be noted that the demand for ESPN remains strong on OTT services. As a result, streaming companies are providing ESPN content on their services. This means Disney will end up getting back all the revenue it was losing as a result of subscriber losses due to cord cutting. ESPN content is being featured on Sling TV, Hulu, PlayStation Vue, DIRECTV and YouTube TV. Walt Disney Co (NYSE:DIS) also plans to launch a new ESPN OTT services later this year using its stake in BAMTech.

Macquarie Capital recently cut its price target on Walt Disney Co (NYSE:DIS) stock to $105 from $125, citing concerns over ESPN subscriber losses. The firm said in a report that there is no chances of improvement in ads and ESPN subscriber numbers anytime soon.

But Walt Disney has a cushion as its revenue stream is highly diversified. The company earns a major chunk of its revenue from its Parks & Resorts business ($4.3 billion in 2Q), and Studio Entertainment. Disney’s studio EBITDA in 2016 was $1.8 billion, compared to $1 billion for the rest of the industry combined.

Walt Disney Co (NYSE:DIS) has some of the largest production houses and ownership of blockbuster movies. The company owns Marvel Studios, Pixar and Lucasfilm Ltd. Disney is behind some of the top grossing movies of 2017, including Beauty and the Beast, Pirates of the Caribbean and Guardians of the Galaxy 2.

It is now confirmed that Disney’s CEO Bob Iger will leave the company by 2019. The new CEO will have to solve the problem of debt, which has reached $17 billion mark.

Walt Disney Co (NYSE:DIS) remains an attractive long-term opportunity. However, short-term gains from the stock may not be that easily realized.