If You Can't Beat Disney, Join... the Yankees?
The day is nearly at hand. That beautiful day when we can watch Iron Man and Simpsons re-runs until our eyes bleed — for just $6.99 a month!
Mark your calendars: November 12 is the day Disney+ officially launches.
Of course, shares of Disney have already launched 30% or so this year...
And the windfall was foretold during first quarter earnings, when Disney dropped a hint to the savvy that it would hold a special analyst day on April 11 and reveal the secret sauce, also known as the monthly subscription fee.
Fortunately, I am a charter subscriber to Savvy Investor Monthly and coolly recommended Disney to my own Wealth Advisory subscribers in late February so we could catch the tenderloin of that meaty move. We've got a tasty 20% gain so far, and the meal is far from over.
Because analysts have been quietly getting very bullish on the potential for Disney+.
Consider this: At the April 11 analyst day, Disney said it felt confident that it could hit 60–90 million total global subscribers by 2024.
60–90 million sounds like a lot, right? Well, I will be very disappointed if that's all the company can muster. After all, Netflix has 60 million customers... in the U.S. alone!
Disney+ will run you $6.99 a month. Netflix is darn near double that. And even though Disney+ will only have around 20% of the content that Netflix has when it launches, it will be quality content. And the potential for Disney to start premiering movies on its own platform will makes this subscription a must-have the world over.
Looks like most analysts out there have quietly raised their Disney+ subscriber estimates into the range of 140–180 million after five years. I get that it is standard operating procedure for any public company to under-promise and over-deliver, but sheesh.
The question investors need to ask is: how much of that growth is priced into the stock at ~$135 a share?
Times like these you might think the forward price-to-earnings ratio would be helpful. Sadly, it's not. Disney's forward P/E (based on analyst earnings estimates for the next year) is 23. The trailing P/E is 17.
In a very general sense, we expect earnings to grow from one year to the next. And so forward price-to-earnings ratios (which measure a stock's price in terms of earnings per share) should be lower than the trailing number. And when they're not, it suggests earnings are falling.
Now, falling earnings don't necessarily rule out a stock, but you better understand why the company isn't growing. For Disney, it's two things. One, Disney has been setting box office records with Marvel and Star Wars over the last few years. Analysts are simply saying maybe it's as good as it can possibly get right now.
And two, there will be costs associated with the rollout of Disney+.
For me, the bottom line is that Disney+ could add around $13 billion in revenue a year. And because Disney will have very low content costs (unlike Netflix, which spends nearly all revenue on content), this is very high-margin revenue.
In other words, the hit to earnings is temporary and no big whoop.
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About Those Damn Yankees
I live in Baltimore, so, Orioles fan. I know. It's brutal. But the lack of a salary means the O's simply can't compete with a big market team like the Yankees. Good thing we have Boston in the division, too! Wouldn't want people to think we have it easy or anything.
No, the Baltimore Orioles have to go a different route. Which likely means a total from-scratch rebuild every seven years or so.
In the world of streaming services, Disney is gonna be the Yanks. Juggernaut. Unbeatable over time. Smaller streaming services are gonna have to play a different game.
And in this case, Amazon Prime Video is the Baltimore Orioles. It doesn't make any sense for Amazon to try and compete directly with Disney. Because Disney has the lower content costs, it will always win. So Amazon is playing a different game.
We all know the point of Prime Video is just to keep people re-upping their Prime memberships. Incremental improvement to the service will work just fine for that.
But here's an interesting move. Because of its Fox purchase and ownership of ESPN, regulators are forcing Disney to sell a bunch of regional sports networks. One of those networks is the YES network — the one that airs Yankee games in NYC. And Amazon bought in and now owns 15% of the YES network, with an option to buy more.
Amazon will already be showing Thursday Night NFL games this year. It has Premier League Soccer. And now maybe it'll be streaming Yankees games to Prime members.
I mean, I won't watch the hated Yankees. But I bet a lot of people will. And I'll bet ya dollars to donuts the cost of that Prime membership is about to go up. That's why one investment bank just raised its price target for Amazon to — drumroll, please — $2,600 a share. Crikey, that's a lot to plunk down for a stock.
Fortunately, there's a better way to make the same gains you would on Amazon, but at a fraction of the share price. Check it out here.
Until next time,
A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.
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