Bear of the Day: Walt Disney Company (DIS) – September 20, 2019

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The Walt Disney Company (DIS Free Report) is the world’s largest media and entertainment company with a market capitalization of $246 billion. A component of the Dow Jones Industrial Average for the past 28 years, it’s a part of countless investors’ portfolios and likely will be for the foreseeable future.

Disney’s formidable catalog of entertainment content and other popular assets (including theme parks, cruise ships, sports teams and media companies like ESPN) make it the 800-pound gorilla in the entertainment business – the giant that all challengers tend to be judged against.

Almost all of us grew up with Disney products, from animated features and live action movies to television shows and, if we were lucky, a trip to Disneyland in California or Disneyworld in Florida. The Mickey Mouse mascot is recognized all over the world and continues to introduce new generations of Disney fans (and future customers) to the brand.

So how could an American success story and industry juggernaut like Disney possibly be the Zacks Bear of the Day?

Streaming.

The entertainment world is changing rapidly and an ever-increasing number of global consumers want their audio and video entertainment options to be delivered to them wirelessly on electronic devices. The established leader in Streaming has been Netflix (NFLX Free Report) but a huge number of new entrants in the market look to significantly change the landscape.

Disney is about to be one of those new entrants and there’s going to be plenty of competition.
A comprehensive list of (existing and planned) streaming services would literally take too much space, but the major players are Netflix, Amazon (AMZN Free Report) Prime Video, Hulu, Sling, YouTube TV (owned by Google parent Alphabet (GOOG Free Report) , CBS All-Access, Sony Playstation Vue, HBO Now and a new offering from Apple (AAPL Free Report) – Apple TV Plus, which will debut on November 1st for $4.99/month and will also be included for free for a year for purchasers of a new Apple Phone, Tablet or Computer.

Netflix alone will spend $15 billion on original content in 2019 in an effort to retain the customers who have grown accustomed – and in some cases, borderline addicted – to its popular offerings. Apple has already spent an estimated $6 billion to land big talent like Reese Witherspoon, Jennifer Anniston and Aquaman-star Jason Momoa to star in it’s own original movies and series.

Apple is just getting started, and although it’s initial offerings will be limited to its own original productions, the company has somewhere around $100 billion in cash and equivalents on the balance sheet that it wants to return to shareholders. Share buybacks and dividends have been the preferred method so far, but Apple could afford to massively outspend all the other streaming competitors on content without feeling much pain.

Disney started acquiring technology and infrastructure for a streaming service in 2017 and also started pulling distribution of its content from Netflix at around the same time. Disney Plus was officially announced in November of 2018 and with the enormous catalog of entertainment options, it was expected that they would come to dominate streaming the same way they did conventional movies and television.

A couple years is forever in the world of tech however, and Disney is facing considerably more competition for streaming services than could have been predicted in 2017.

The Zacks Consensus Earnings Estimate for Disney in 2019 has fallen from $6.63/share all the way to $6.00/share in the last 90 days. 5 recent downward revisions earn Disney a Zacks Rank #5 (Strong Sell).

It would probably be a mistake to count the big giant out for long. With experienced management, plenty of assets and an enviable catalog of entertainment options, you can bet that they’ll eventually be on top again.

For the time being however, investors will probably want to steer clear of the streaming business altogether as big and small players duke it out over prices and content spending in what’s shaping up to be a protracted battle.

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2019-09-20 10:45:00

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