Complete Disney ($DIS) Stock Analysis - Spicer Capital

Complete Disney ($DIS) Stock Analysis

I'm excited to share my analysis of The Disney Company (DIS) with you. I put together this post plus several videos for you. I sincerely hope they help!


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This post is for information purposes only. It does not represent a recommendation to buy or sell. Information expressed does not take into account your specific situation or objectives, and is not intended as recommendations appropriate for any individual. Readers are encouraged to seek advice from a qualified tax, legal, or investment adviser to determine whether any information presented may be suitable for their specific situation.
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WHY DISNEY?

The reason I initially looked into Disney is because of the Insider Community. They voted and told me that they were interested in a deep dive. So, I went deep sooner than I was expecting, and frankly, I’m glad I did.

The reason I say this was sooner than I expected, is because I generally don’t invest in blue-chip stocks this long into a bull run. Instead, I compile my "blue chip shopping list" in preparation for a crash.

That’s not me touting any sort of predictive abilities. It’s just me accepting the cyclical inevitability of a significant drop at some point, as well as the potentiality of something more catastrophic happening.

Again, not a prediction. Just an observation.

And with that observation, most of you know that I feel more comfortable investing in the hard-to-find, lesser-known, deep-value stocks.

Well, Disney obviously doesn’t fit that bill. Its information is widely known by anybody, especially those with a significant amount of investable assets, and so it’s hardly "deep-value" and it’s definitely not lesser-known.

But it’s been on that shopping list for a long time (along with Google, Amazon, and their ilk), because it’s during those rare times of chaos, that the proliferation of all that information actually doesn’t matter. Fear takes over creating a unique - perhaps only a few times in a lifetime - opportunity. So, I don’t want to miss it!

That being said, if there is a recession, for example, in the next couple of years, I would expect Disney to suffer (even if not quite as much as some other companies). And if that happens, assuming my thesis has remained intact (which, of course, is not guaranteed by any means), I plan to load up on this one.


DIS THESIS

I've created three public videos about Disney that you should definitely check out so you have all the context you need for the rest of what I'm about to share with you. Here are the links:

  1. The Complete History of the Disney Company - https://youtu.be/1JmmTsKgpc4 (scheduled for 2/4 at 2:00 pm CST)
  2. 6 Reasons to Own DIS Stock - https://youtu.be/fpRu90KhXio (scheduled for 2/6 at 8:00 am CST)
  3. 3 Reasons to NOT Buy DIS Stock - https://youtu.be/z-GUDA5TQeA (scheduled for 2/8 at 11:30 am CST)

So here are my most important thoughts that ultimately shaped this blue-chip thesis:

I am long Disney. It’s not because of the box office or the park expansions - now, don’t get me wrong, I’m glad those are happening, and I do think they’ll help the overarching narrative, if the rest of my thesis plays out, which means even greater upside resulting from euphoria (that can happen to a stock when there’s just so much positive news) - but those facts, specifically, I believe are already accounted for in the stocks price (not the potential euphoria, but the projections), and I have no unique knowledge as to whether or not the company’s projections will turn out to be high or low… so, I’m not trading on those points.

I think the real opportunity lies in the two big question marks - the unknowables - for 2019: the FOX merger and the Disney+ launch.

21ST CENTURY FOX MERGER

Let’s start with the first (which is actually a decent negative for me right now). I have no idea what to expect from the FOX merger. And I think the general assumption seems to be that it’ll work. Which means, IF it doesn’t, that could hurt a lot. That’s why I spent so much time on my concerns in that third video. It could fail. Statistically, it won’t produce the anticipated synergies - statistically, it should fail. Heck, it could end up joining AOL as one of history’s worst merger-blunders, for all I know...

Now, I don’t necessarily expect it to. Iger’s done a good job so far (but obviously he hasn’t had to tackle anything quite this large). I just don’t know. It’s easy, sometimes, I think, for us, to visualize how easily these two companies could go together and how grand that could be… but it’s also easy (and I think pretty dangerous as an investor) to underestimate how difficult it’ll be to change such a large company’s culture.

Consequently, I expect, after the deal is done, the stock price will fluctuate more significantly.

So, be prepared for that.

But, it’s the other ‘unknowable’ that I’m more excited and optimistic about.


DISNEY+ LAUNCH

I think Disney+ is going to do well. I talked in the third video and in the video I did for Ryan Scribner’s YouTube channel about how stocks work when there is an unknowable ahead - how the stock will essentially trade in balance among the possible outcomes.

Disney is and will continue to trade within that range until the results start to roll in after their late-2019 launch. So that’s really what I’m most excited about.

I can’t help but draw the parallel to Netflix and every time it releases its quarterly reports. It’s trading within that range driven primarily by all the possible outcomes for their subscribership growth. And then once that number moves from unknowable to known (once they’ve disclosed it), there is often significant movement, one way or the other.

Well, with that precedent in mind, now, consider Disney - a much more robust and dynamic company with multiple sources of revenue insulating it from downturns. IF they can grow to where they experience Netflix-like subscribership growth from quarter to quarter, think about the implications:

  • If they’re doing that, they would surely be stealing market share from Netflix.
  • The race now is for the best original content - that’s what ‘cord-cutters’ are going to pay for. Now, Netflix, Disney, Fox, they’ve all proven they can create binge-worthy and highly-profitable original content. And now consider that the combined budget of Disney and Fox for original content was just about double Netflix last year. So, Disney’s ability to sustainably and profitably crank out more or to strategically outbid Netflix for the rights to certain anticipated series is undeniable.
  • And here’s the deal-sealer for me: they are profitable - right? both Disney and Fox currently operate with positive cash flow ...not Netflix. Netflix is banking on the ability to do that in the future (worked for Amazon, right?), but that vision is put in jeopardy the moment their market dominance starts to come into question. 

So, let me repeat that original idea: IF Disney can grow to where they experience Netflix-like quarter-over-quarter subscribership growth, I think Netflix will be in trouble - at least, so long as it maintains its current trajectory - which, Reed Hastings, Founder/CEO of Netflix, has proven himself nothing if not adaptable…


IMPLICATIONS ON VALUATIONS

But think about what Netflix is worth today as the most dominant player in the online video-streaming market - around $150B - or, in other words, about 90% of what Disney is worth today. And remember, this is all Netflix does. I mean, compare its 2018 $16B in revenue (and that’s probably the most generous figure for us to use to compare) to Disney’s DIVERSIFIED $59B!

So, then the question here, is what would Disney be worth if Disney+ was able to achieve that level of growth (or anywhere close to that level, for that matter)? I don’t know that answer to that - I think Netflix is overvalued, so I’m not going to use its valuation metrics for any sort of precision here. But my point is (and I hope it’s obvious by now): it stands to reason that it’d be worth a lot to investors.

CAN DISNEY DO THE IMPOSSIBLE?

So, then the next logical question - the real question here - is: can Disney achieve a growth rate anywhere near that of Netflix? Obviously, only time will tell with all of this, but here are the considerations that come to mind when I think about this:

  • Hulu and Netflix grew their US-based subscribers at just about the same rate in 2018 (between 8 and 9MM). Disney will now own 60% of Hulu. So whatever Hulu has been doing to start to compete with Netflix, Disney now has access to - their marketing, their talent, their management, I don’t know specifically what it is, but Disney now has it.
  • Consider the fact that Hulu did that while spending about 30% of what Netflix did on original programming.
  • Now, Hulu is only in the United States. So, they haven’t laid the groundwork internationally yet as Netflix has. But, Disney has experience overseas. Plus, it’s not new ground anymore - some of the hurdles that existed before, well, Netflix has broken through them - Netflix has shown the path, they’ve laid the groundwork, so to speak.
  • Add to all of that the international recognition of the content IP that Disney+ will bring to the table… and it’s not hard to imagine Disney getting its international foothold much faster than Netflix was able to.
  • So, with the right offering on the Disney+ platform, it’s not hard for me to imagine that level of growth.

I’m not saying Disney will dethrone Netflix. But I think this opportunity is Disney’s to lose here. I think they have everything going for them on this front to just blow expectations out of the water. Now, they could get the programming - the content offering - wrong… they COULD get a lot of things wrong. But, if they get it right - and I think there’s a lot of evidence to suggest they will - I think there’s a lot of upside here over the next few years. (Also, side note, if that happens, I think Netflix’s valuation will come into question, but maybe we can discuss that some other time.)

Now, if all of this plays out as I’ve outlined here, I would expect bigger moves in 2020 and potentially in 2021.

Now, that’s a long time, so, I need to leave an important caveat: I wouldn’t be surprised if there are some negative macro influences that end up affecting the price and direction of the market as a whole over that time period. And obviously, as is always a possibility, that could affect my thesis here.

But I’m not going to wait around for that. Because, unlike with many other blue-chips, if a recession doesn’t happen during that time, I anticipate significant (relatively short-term) upside-potential with little LONG-TERM downside risk.



HOW I PLAN TO 'PLAY' DIS 

If you're interested in the exact strategies I'll be considering for my personal portfolio (of the most recent stock I've covered plus all future stocks), let me know here and I'll send them straight to your inbox.

I'll not only send you the strategies I'll be using myself, but I'll also put together a couple other ideas you might want to consider that might work better for you (considering your unique style, goals, temperament, etc).

Hopefully, that'll give you some ideas as you conduct your own thorough analysis.


WANT EVEN MORE?

I sincerely do hope you find this information helpful even without knowing my specific trades going forward. Those will be shared in the more intimate setting of our exclusive Insider Community

However you proceed, I hope to help however I can and wish you all the best.

Take care!

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Stephen Spicer

Stephen Spicer, CFP®, AEP®, CLU® is the founder and managing director of Spicer Capital, LLC. He is married to his high school sweetheart, and they have three amazing boys.

  • Chris says:

    Great piece. I think you and I came to the same conclusions about the company in relation to Netflix. However, I didn’t look into Hulu too much so those were some really great points you brought up. Disney is no doubt a great company, and has great long term perspectives. It’s the valuation piece I’m hung up on. I’m not sure if the price I’d be paying right now is a bargain, a fair price or if I’m overpaying.

    • Stephen Spicer says:

      Absolutely, Chris! That’s a good question. It’s tough to value a company like Disney. I tried to break it into parts. But once I considered the two big unknowables that I talk about here (the Merger and Disney+) I felt anything was too arbitrary. Consequently, anything I buy today would be more for the growth story (a Disney+ success, as I outlined). If something happens before that (or the Merger or Disney+ prove disappointing) THEN I’d gladly start scooping up more DIS for its value and long-term viability – the “recession shopping list” I mentioned.

      Thanks for commenting, Chris! Best of luck!

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