Chart of the Day: Is Disney the New Way to Play a Secular Streaming Shift?


Disney’s (DIS) dive into streaming might make it one of the most appealing ways to play the direct-to-consumer (DTC), cord-cutting trend.

As investors anxiously awaiting the company’s earnings call Thursday evening, wherein DTC and OTT product progress will be key, many wonder whether or not the nearly 100-year old media company can catch young upstart Netflix (NFLX) .

TheStreet’s founder and Action Alerts PLUS portfolio manager Jim Cramer has certainly indicated his belief that this it can.

“I believe in [CEO Bob] Iger,” Cramer said on CNBC ahead of the release. “You have to believe in Iger and the quality of the product.”

He added that he sees Disney soaring to $150 per share in the future on the basis of OTT and DTC product offerings. He has been bullish on these releases since the company’s August earnings, when streaming services became a major focus on the conference call.

“Netflix was a favorite of mine for a very, very long time, but after it got bigger than Disney I switched my focus to say buy Disney,” he said in his assessment in October. “Disney is still the way to play it.”

(Disney is an Action Alerts PLUS holding.)

Hulu Helps Out

Iger’s discussion will be slightly altered this quarter due to progress in the Twenty-First Century Fox (FOXA) deal in regards to regulation.

The closing of the deal, which is slated for the first half of 2019, will give Disney a controlling stake in the streaming service Hulu and hasten growth in streaming services.

The control provides Disney a bit of a boost given its recent acceleration and added benefit of establishing Disney as a DTC player prior to the kickoff of “Disneyflix” in late 2019.

“Hulu has grown to over 20 million subscribers as of May 2018, nearly 8 years following the initial launch of its subscription streaming service in mid-2010,” Morgan Stanley analyst Benjamin Swinburne noted. “While this is still below Netflix at over 55 million US streaming subscribers, it is notable that Hulu’s subscriber growth has accelerated in the last two years.”

Debt Dealing

Of course, with the Fox deal that donated the Hulu stake to Disney costing a whopping $73 billion, there are concerns over the debt load taken on.

While it is true that Disney maintains nearly $20 billion in debt, its debt-to-equity ratio is far below that of Netflix. Disney clocks in with a debt-to-equity ratio of 0.35 while NetFlix charts a staggering 1.66, which is only set to balloon.

Netflix will likely need to continue to go to the junk debt market again, as companies such as Disney pulling their content from Netflix means it will need to pursue more and more original content to keep up with Amazon (AMZN) and Disney’s new offering.

Belief in Bob Iger, as Jim Cramer has, is key here since his experience in production and series creation should give him an edge on Netflix, which by comparison is still in the beginning stages of becoming a self-reliant platform.

To be sure, Netflix has the market saturation and has shown itself to be the premier choice for younger viewers in particular. Additionally, its blowout earnings release in October suggests its global growth will present a staunch challenge to Disney’s dive into streaming.

In any event, few would question the necessity of Disney’s push into DTC given secular trends. The question over whether it is the way to play this shift for stock-pickers remains to be seen.

For now, investors like Jim Cramer believe in Iger.

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2018-11-08 13:26:00

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