Vengeance Could Be the Key to Reviving Disney Stock
Disney (NYSE:DIS) has completed its acquisition of Twenty-First Century Fox. Now, the focus shifts to Disney’s upcoming streaming service, Disney+ and its impact on Disney stock.
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Disney stock moved higher in the first half of the decade. However, the rise of streaming chipped away at its TV revenues. With Disney+, the company has a chance to revive the growth of DIS stock by employing a plot twist common to many of its movies—revenge.
No, the company does not plan to revive Disney stock by poisoning apples. Nor will it push a king off of a gorge’s edge. However, it does plan to take back a source of revenue that it lost to a rival.
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Netflix-Inspired Cable Cutting Left Disney Stock Range-Bound
The cable-cutting trend inspired by Netflix (NASDAQ:NFLX) undermined the revenue of both the Disney Channel and the company’s ESPN channels. From a low of almost $15 per share in March 2009, DIS stock began a meteoric rise, reaching the $115 per share level by early 2015.
However, Netflix inspired many consumers to drop cable packages that brought them the Disney Channel and ESPN. As a result, the rally of Disney stock came to an abrupt halt. DIS has remained range-bound for the last four years.
However, using ESPN+ and soon Disney+, Disney aims to reclaim that lost revenue. Disney will soon migrate its content from Netflix to its new platform. In an interesting twist, that could enable DIS to exact “revenge” by undermining Netflix in the same way that Netflix undercut Disney. When Disney+ launches, the company that is arguably Netflix’s most important content partner will become its most formidable rival.
Although NFLX continues to spend billions on developing content that will keep its viewers subscribing, it will probably not be able to match the decades of material created by Disney. Furthermore, after DIS made a series of acquisitions such as Marvel, Lucasfilm, and now, Fox, many iconic franchises developed over several decades reside inside the Magic Kingdom. That will help DIS keep its lead over Netflix and other content providers such as Comcast (NASDAQ:CMCSA) and AT&T (NYSE:T).
Disney+ Could Increase the Valuation of Disney Stock
Walt Disney Company encompasses much more than its new streaming services. Its Parks and Resorts division continues to provide reliable,increasing cash flows Since, in addition to that unit, DIS also has its Studio Entertainment and Media Networks, and its other lines of business, investors should look at Disney as an entertainment conglomerate.
Still, the problems of Disney Channel and ESPN stopped the rally of Disney stock. Perhaps bringing some of the revenue that the channels lost back could reignite DIS stock. Moreover, the current, 15.4 price-earnings ratio of Disney stock appears too low for a company that could soon topple the dominant player in the streaming industry.
I do not think that DIS stock will ever regain the triple-digit, price-earnings ratio that Netflix has reached in recent years. However, before consumers began to drop ESPN and the Disney Channel, the price-earnings ratio of Disney stock was above 22. Simply returning to that multiple could take DIS stock higher by about 50%. Also, the equity could surge beyond that point if the multiple of Disney stock rises above its historical average.
The Bottom Line on DIS
A few years ago, DIS stock stopped moving higher due to the changes Netflix brought to the industry. Now, DIS could rise as Disney upends Netflix, utilizing the same technology which built the streaming giant.
Disney’s lead in content could potentially make it the leader of the video-streaming sector. Moreover, with much of its lost revenue stream restored, DIS stock could finally see its lagging PE ratio rise to its pre-2015 levels. If that occurs, the “happily ever after” ending that the owners of Disney stock have long sought could become reality.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
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