It’s really time to throw in the towel on Walt Disney Co (NYSE:DIS) stock. As I warned previously and as the company’s second-quarter results showed, DIS stock is simply too leveraged to multiple sectors that are in steep decline.
The revenue of the company’s Media Networks unit, which is dominated by ESPN, dropped 1% year-over-year and its operating income plummeted 22% year-over-year. DIS blamed part of the decline on a payment of about $400 million for a new NBA deal, but obviously, the growing trend of cord cutting is taking its toll on the unit. Further proving that point, Disney noted that the ad revenue of both ESPN and the ABC network fell year-over-year last quarter.
It’s also worth stating that, despite the decline, Media Networks still accounted for over 45% of the company’s operating income last quarter, along with over 40% of its revenue.
Lousy Results for DIS Stock
Things were much worse at Studio Entertainment, whose operating income tumbled 17% and whose revenue fell 16%. The unit accounted for nearly 17% of DIS stock’s revenue last quarter and brought in nearly 16% of its operating income.
Obviously, like movie theaters, the unit is being hurt by the rise of Netflix, Inc. (NASDAQ:NFLX), as “Netflix and chill” increasingly replaces movie dates and “binge watching” increasingly replaces going to the theaters with family and friends. As Vanity Fair put it in a recent headline, “Hollywood as we know it is already over.” The sub headline noted that “theater attendance (is) at a two-decade low and profits (are) dwindling.”
When a company derives over 50% of its revenue and operating income from sources that are increasingly being phased out of society, it’s probably a pretty good idea to avoid holding its stock.
New Channels: A Real Long Shot
But wait a second! How about Disney’s much-hyped decision, announced in conjunction with its results, to abandon its deal with Netflix and launch two of its own streaming services? Specifically, the company said that it would start an “ESPN-branded multi-sport video streaming service in early 2018, followed by a new Disney-branded direct-to-consumer streaming service in 2019,” The Fly reported.
But aside from the fact that they won’t get off the ground for at least several months, there are other reasons not to be overly optimistic about the upcoming channels. First of all, the sports service could be quite cannibalistic, encouraging more sports lovers to drop their high-priced cable subscriptions and therefore cutting into the revenue that DIS stock obtains from advertisers and cable companies.
In fact, a number of media executives told CNBC that even if DIS convinces 20 million people to pay $10 per month for its video streaming service, the resulting revenue still might not fully replace the lost money from the canceled Netflix deal and the continued declines in ESPN’s subscriber base, CNBC reported.
Meanwhile a survey of 500 Netflix users by research firm Piper Jaffray showed that only 20% of Netflix subscribers spend more than 10% of their time on the service watching Disney content, The Fly reported. So it seems unlikely that the Disney-branded streaming channel will attract many subscribers, especially because Netflix will doubtlessly quickly find alternative, kid-friendly content after its pact with DIS ends.
Far from being a well-thought-out strategy, launching the streaming channels seems to be a combination of a “Hail Mary” attempt and a thoughtless, reflexive “if you can’t beat ’em, join ’em” move. The fact that the news served to distract investors from another weak quarter was probably an important bonus for the company’s beleaguered management team.
Sell Disney stock before cord cutting and Netflix addiction really decimate the shares.
As of this writing, Larry Ramer did not hold a position in any of the aforementioned securities.
