Disney (DIS) reported their third quarter earnings on November 8th and they were pretty good. Here were a few takeaways:

• Overall revenue was up 12% year over year
  • Media networks was up 9%
  • Parks and resorts was up 9%
  • Studio entertainment was up a whopping 50%
  • Consumer products was down 8%
• Net income was up 33% year over year

Those are some great numbers, especially for a company the size of Disney. One of the reasons I like the company as an investment is how impressively diversified they are in how they make money (TV shows, movies, amusement parks, toys) and how they seem to excel in all the different things they do.

However, for as great as Disney has been at so many things, its stock has been a relative under-performer the past few years. Just look at the chart above and how it’s been overall flat for the past few years. One of the biggest reasons for that under-performance is due to concerns about cable cutting. Disney owns ESPN, which makes a lot of money off cable TV packages, and the rise of streaming video services (and fall in cable TV subscriptions) has taken a decent sized bite out of that revenue stream. Investors worried if the rise of Netflix (NFLX) was going to spell the doom of Disney (sounds like a pair of Star Wars movies). That concern seemed especially justified when Netflix’s market cap briefly surpassed Disney’s earlier in the year.

While I think those concerns were justified at the time, I’m far less concerned now and in fact I am really excited about Disney’s recent moves. CEO Bob Iger has seen the writing on the wall and, armed with a new contract, has begun a bold process of having Disney jump into the video streaming arena. Netflix has a huge head start, but if anybody has what it takes to be the Pepsi to Netflix’s Coke, I think it’s Disney.

If anybody has what it takes to be the Pepsi to Netflix’s Coke, I think it’s Disney.

Why? There is a saying that content is king. If that’s the case, then Disney is the king of kings. Here are some of the franchises and studios that they own:

• Walt Disney Animation Studios (duh), known for blockbuster hits like Frozen, Moana and Wreck-It Ralph.
• Pixar, known for blockbuster hits like Toy Story, Finding Nemo, and The Incredibles.
• Marvel, known for the highest grossing film of 2016 (Captain America: Civil War) and the two highest grossing films of 2018 so far (Black Panther and Avengers: Infinity War).
• LucasFilm, known for the highest grossing film of 2015 (Star Wars: The Force Awakens) and 2017 (Star Wars: The Last Jedi).
• TV stations like ABC and ESPN.

And assuming the Fox deal closes, Disney will have even more content, including a majority stake in Hulu. Over the past 3 years (2016, 2017, 2018), Disney has had the two highest grossing films each year at least. 2016 in particular showcased the strength and diversity in the movie content that Disney offers. They ridiculously had the top 5 highest grossing films of the year (Captain America: Civil War, Rogue One: A Star Wars Story, Finding Dory, Zootopia, The Jungle Book). Each of those movies came from a different segment of Disney (Marvel, LucasFilm, Pixar, Disney Animation Studios, Walt Disney Pictures).

Put simply, Disney has the content that people want, and that gives them incredible leverage when creating a new video streaming service even when the market is already saturated with them. Their ESPN+ service hit over a million paid subscribers within 5 months. Their newly announced Disney+ service that is launching next year already has Star Wars and Marvel shows based around Cassian Andor and Loki planned along with a reboot of High School Musical and a new series based on Monsters Inc. It’s hard to imagine somebody who couldn’t find at least one show that appeals to them and a dedicated Disney streaming channel would presumably be a must have for anybody who has kids. I simply can’t see how this could be anything but a huge success for the House of Mouse.

I’m still bullish on Netflix, though. I don’t think the video streaming segment will be a winner-take-all space. I think there will be room for a few different players to flourish. However, I am particularly excited to see the splash that Disney makes next year. This could be big.

Speaking of big, Disney is a Serenity level holding in the Freedom Portfolio, which is kind of the opposite of big. There’s two important things to note, though:

• Disney was one of the larger Serenity level positions and was right on the border of an Enterprise level position. In fact, at the time of this writing, it had graduated to an Enterprise level position.
• Unlike many of the larger positions in the Freedom portfolio, Disney didn’t quite grow its way there. As I noted above, Disney has been relatively flat lately. Over the roughly 5 years I’ve owned the stock, it’s actually losing to the S&P 500 (although just barely).

P.A.U.L. Score

Protected: 5

Pretty much what I talked about above: Disney has so much content that people want and occupies such a huge space in pop culture. Star Wars movies are still huge events. Few movie franchises are hotter than the Marvel Cinematic Universe right now. Pixar just keeps churning out wildly successful kids movies that adults love as well. Disney World and Disney Land are still the places parents aspire to take their kids to. This gives them an amazing advantage that shows no sign of going away anytime soon.

Alternatives: 4

It’s hard to imagine that a little over a decade ago, Disney didn’t own Pixar, Marvel or LucasFilm. It’s amazing to consider how much those acquisitions have changed Disney and its prospects going forward. Where can they go from here? Who knows? The Fox acquisition will bring in new Marvel characters like the popular X-Men and also allows Disney to rehabilitate the movie fortunes of the Fantastic Four. Maybe Disney gets really bold and acquires DC Comics to reboot the Batman and Superman franchises. Maybe they take their popular characters and get into video games. Even the re-imagining of classic animated Disney tales as live action movies (The Jungle Book, Beauty and the Beast, etc) is a largely untapped possible alternative path for them to take. There are lots of possibilities.

Understanding: 4

While Disney does a lot of different things, it still seems like a fairly easy company to understand. They make things that people want to see, and use those successes to convince those people to come to their amusement parks and buy their toys and other licensed merchandise. As long as they can keep producing the hits (which seems almost automatic at this point), then the cycle keeps on going. 

Long Runway: 3

How much runway is available for Disney? It’s hard to say. They’re already one of the largest media companies in the world with a market cap of $170 billion. Yes, there’s still a lot of opportunity in front of them in terms of video streaming and other potential avenues, but it’s a little hard to lay out a case for how they double or triple in size anytime soon. Disney had a pretty nice deal with the cable companies where they were paid a lot of money for ESPN and Netflix was paying a lot to license Disney content. Even if their new ESPN+ and Disney+ streaming offerings are wildly successful, they might not bring in much more revenue than Disney was making before. This doesn’t mean that Disney can’t grow, just that it might not have the same growth opportunities as some other businesses.

It is worth noting, however, that once the Fox deal goes through, Disney does have an intriguing opportunity in India ahead of it thanks to owning Star India. International expansion could ultimately be Disney’s biggest opportunity.

Total Score: 16

Disney is a great company which is in a bit of a transition and that has shown up in the stock price the past few years. The investments made during that time are about to pay off, though, and 2019 should be a (relatively) exciting time for Disney shareholders. I can’t tell which I am more excited about: Seeing how successful they are with their new streaming services or watching some of the new shows they are developing for the aforementioned services. That seems like a good thing.