With three little boys, living in Southern California, Disney makes up a big part of my life. I’ve got a DVR and two iPads 98% full of Marvel, Pixar and Star Wars movies and apps, closets full of Cars, Iron Man and Avengers clothes, and toy boxes full of light sabers, toy cars and action figures.
Shorting Disney into its last earnings report was one of my best risk/reward trades for 2015.
Sentiment and valuation had gotten a bit one-sided. Investor sentiment was high due to profits from the hit Avengers sequel and looking towards both the upcoming Star Wars movie and Chinese theme park opening in 2016. Surprise, turns out Disney gets most of its highest-margin revenue from captive cable subscribers who are forced to pay $6 monthly for a channel that perhaps as much as 80% of us don’t tune into –even once a month– and only 20% of us are willing to pay for on an unbundled basis.
Disney reports this Thursday. It was down as much as 4% today thanks to HBO reminding everyone that the kids these days are getting more of their viewing entertainment from their iPhones, YouTubes and Netflixes, and would prefer not to pay $150 per month for reruns, 20 yr old movies and house flipping reality tv.
“Is this going to be a problem Bob?” asked the Disney faithful, when the shocking news hit last August.
“Not to worry. We’ve got our fingers on the streaming button. And, best of all, Star Wars. Marvel.” said mouse chief Iger back in August.
“Excellent!” said his investors, as they drove the stock back towards its pre-earnings high over the course of October.
I’m sorry, I see there’s a hand up over there in the back corner. Yes, you have a question?
What happens to all of Disney’s captive ESPN revenues and profits if they really get serious about streaming, and the clauses in their cable contracts kick in, allowing ESPN and the Disney channel to be de-bundled?
Why did they negotiate a termination clause in their streaming deal with Dish allowing them to pull out if a.)SlingTV gained 2M subs OR if b.) Disney lost 3M Nielsen households?
Good questions. Well, as all of Disney cable & networks revenue represents 44% of total DIS revenues, and 54% total operating income for the last trailing twelve months, and given –when compared to high-capex businesses like parks and movies– that ESPN is, by far, their most profitable revenue stream, they’re pretty screwed. If cord cutting continues on trend, we could see $80 in a year. If skinny bundling picks up steam, which is exactly what will happen if Disney does anything beyond talk about streaming, then perhaps $60.
For this Thursday earnings, shorts should consider hedging. Iger and team have had time to pretty up the story and it wouldn’t be a surprise to see the stock pop if they have any good news to sway sentiment on the cord cutting issue.
I had been planning to get short had the stock continued its ramp towards $120 prior to ER, but for now, I’m on the sidelines, hoping for higher levels. I think we’ll get it, The Force is too strong with them this close to the release. However, the probabilities favor a long term decline. Even though I, and millions of other parents will be taking our kids to both The Good Dinosaur and Star Wars 7, in the grand scheme, it won’t really matter given how outsized and important ESPN and cable are to Disney’s valuation.
(But the trapdoor will open if either movie –particularly Star Wars– isn’t a massive hit…)
Risk is high.
-g
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Welcomed post. I am a 51 year old cord cutter. (no kids). Had no idea the cable was the highest margin part of their business. No wonder cable companies are worried. (though they’ll never admit openly). May need to reconsider mom’s long term profitable investment in T.
Bansky’s version: https://www.youtube.com/watch?v=_wruEnynr1w
Not enough people are discussing. As a shareholder, this has me nervous. Though interestingly enough, I think concerns are over done at companies like Viacom, for the moment at least.
I agree. Behavioral economics tries to explain why the discussion isn’t where it needs to be. We humans still operate largely with the same hardware/software package that we developed as cavemen. The biases and fallacies that kept us alive back then do a pretty terrible job of deciding what makes a good/bad investment and when to buy/sell.
For some Disney shareholders, suggesting it’s trading at 2x the proper valuation is the same as attacking their most cherished family memories.
“Seriously, how does anyone not like Star Wars? Avengers? The theme parks? Those guys must be printing money!”
Well sure, but all that stuff is less than half the company. The other half is even higher margin businesses that they were able to wrangle only by leveraging who they are as content-powerhouse Disney. They forced the cable companies to bundle ESPN (at $6 per month, its 5x the next most expensive channel) whether most of the subs want it or not.
They’re really between a rock and a hard place. Cable cutting is bad, but that’s going to take a while (they hope.) Its the skinny bundling that has them terrified. As many as 80% of cable subs might walk away from ESPN if they ever get the chance. To make up that revenue, they then need at least 10m subs to spend $30 a month on streaming.
Right now, they’re doing the right thing and playing a delaying tactic. Talking about streaming, talking down the threat, talking about Star Wars and the Marvel universe, while praying the cable cutting trend reverses. This overhang is going to be with them for a while, will take years to work through.
Great post. I’ve been adding to this since $80 – as a grandfather hold. They essentially own the Greek mythology of our time. I believe Star Wars (even if it is shite) will bring mucho dinero simply due to the inter-generational appeal of virtually all living beings on this planet. National Geo did a great map in 2000 of the number of nations who watched the 97 re-release. The international appeal is huge now. No doubt, this will be the highest grossest film of all time. Perhaps the cable-cutting hurts them now, but the characters they own the rights to and the spin-off power they get will make them able to sell rights to use their characters to the streaming providers one day.