Disney (NYSE:DIS) is known as the happiest place on earth and for a while this year, Disney stock was one of the happiest stocks on Wall Street. DIS is up 35% in a year, while the S&P 500 is almost flat.
Source: Baron Valium via Flickr
Clearly, investors love owning Disney stock for now.
The bullish thesis for DIS has been consistently based on the slam dunk success of its movies and parks. There were issues around the cord-cutting panic, but investors have finally come to terms with those fears.
Now, the incremental element to that thesis is the expectations for DIS’s new streaming service to rival Netflix (NASDAQ:NFLX). Bulls have few reasons to fret the event. DIS already owns a ton of content, so it’s a matter of installing a spigot, then turning it on.
Preliminary pricing information suggests that it’s going to be cheap enough that it won’t even have to compete with NFLX. Most people will end up with both services for a while at least.
But even if it did have to compete with the Goliath, I think that DIS won’t be a David. It will be a threat to NFLX instantaneously. But they can both coexist because of the diverse content that they produce. The advantage that Disney has is that it can produce its contents much cheaper than the extravagant sums that NFLX spends on its productions.
Streaming is global so the addressable market is massive. Netflix has the first mover advantage from the streaming perspective … but does it? I contend that Disney was the first mover since no one on the planet doesn’t know Mickey Mouse. So reaching their audience will not be a problem for DIS.
The incremental contribution to the Disney P&L is so potentially huge that I don’t think we can accurately evaluate it now. DIS stock sells at a trailing price-to-earnings ratio of 15X. So it’s already cheap in absolute terms and it’s nine times cheaper than NFLX. All of this means that upside in the stock price is almost a guarantee.
How to Approach Disney Stock Now
Although I’m optimistic about DIS stock in the long term, I’m still apprehensive about the immediate price levels. I just don’t like chasing a stock that left a gap below as big as DIS did in April.
I realize that there are upside catalysts looming just above current levels, so there definitely are important lines to watch in both directions for the short term. But for those who want to own it for the long term, they need not worry about these gyrations around the gaps.
For the rest, I bet that Disney stock fills the gap below as soon as it loses $130.40. This would invite momentum sellers that would quickly target $120 per share. Conversely, if the bulls can break through $136.50, then it could invite buyers to retest the all-time highs. Meanwhile, DIS stock is in no-man’s-land for the short term.
While I realize that not every chart gap fills, I just am uneasy about initiating a full long-term position in DIS with this giant void below. So I should either wait for a better entry point or at most take half of a position to start. This would leave room to add on dips.
Yes, I’m confident that the DIS fundamentals are solid, but I still have to account for headline uncertainty. The U.S. is not done fighting its economic war with China and now it may be opening two new fronts with Mexico and India. So there are external reasons to worry about the effects on the DIS stock price.
The bottom line is that Disney stock is headed higher over time. Holding it long here is a solid investment. But I still should pick my entry points as cleverly as possible and I just can’t fully commit all at once with a giant chasm below.
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