Shares of Walt Disney (NYSE:DIS)declined on Monday,afternews emerged that Amazon (NSDQ:AMZN)is in talks with major sports leagues including MLB, NBA and NFL, to buy live streaming rights. Amazon may offer these as an exclusive premium bundle toPrime subscribers. Amazon is keen on making live streaming of sports a part of its Prime offering as it believes that it will help in growing its prime subscription base. Prime subscribers tend to spend a lot more than non-prime subscribers, hence a growing Prime subscriber base will be good for Amazon. While this move will is good for Amazon stock, is it at the expense ofDisney stock?
The Rising Interest In Live Streaming Of Sports
It’s not only Amazon which is interested in live streaming of sports. Even Twitter (NYSE:TWTR)and Facebook (NSDQ:FB)are vying for rights to live stream big sporting events. As fellow Amigobulls contributor has noted, Twitter is making aggressive moves into live streaming sports events. And it seems to have worked well for the company. Twitter, Facebook, Amazon and ESPN are all in fray to acquire the rights of the Indian Primier League, one of the biggest sporting events in India, with viewership much higher than MLB, NFL and NBA.
The idea of live streaming of sports is gaining currency because of the change in consumer behavior. More and more viewers are doing away with their cable subscriptions and switching to streaming services like Amazon Prime, Netflix and Hulu. These streaming services not only they have a great content library, they also provide convenience and great degree of personalization (on-demand) to consumers.But while streaming services offera variety of shows and movies, sports content remains pretty thin. Sports isone of the main reasons why many consumers still keep their relatively pricey cable bundles. Streaming services expect addition of sports live streaming will attract more subscribers to their services.
How will this affect Disney?
In spite of reporting strong earningsin the current year, Disney stock is down 7% YTD while the S&P 500 is almost up 8%. The decline has largely been because of the negative sentiment surrounding its ESPN franchise. ESPN has been hemorrhaging subscribers in last couple of years due to cord cutting. And ESPN contributes a significant chunk of Disney’s revenues. So any impact on ESPN will be bad for Disney.
While it’s true that in the long run, the new competition will impact ESPN subscriber numbers, the short to medium run impact is likely to remain muted. Primarily because ESPN has entered into long term contracts with most of the leagues. ESPN has secured a contract with MLB (at a hefty price tag of $5.4 billion) that runs till 2021. The contract gives ESPN rights to telecast, in addition to other content, 90 regular season games each year, ten Spring Training games, a Wild Card game and All-Star week coverage. Similarly ESPN’s contract with NFL to broadcast Monday Night Football also runs till 2021.
But while Amazon’s latest moves may have little impact on ESPN, the latter will continue to see a drop in subscriber numbers in coming months due to cord cutting. To counter this, ESPN has bought a33% stake into BAMTech, which is into live streaming of sports content. Ithas also entered into agreements with Hulu and AT&T Direct to decrease its reliance on traditional cable network. And as the reaction to the latest earnings report indicate, investors are realizing that concerns around ESPN franchise were overdone.
Long Term Prospects RemainEncouraging
Disney ended FY 2016 on a strong note, reporting record levels of revenue and earnings.The company continues to generate billions of dollars in cash flows. Disney’s operating cash flows increased by 21% and free cash flows increased by nearly 30% YoY in FY 2016.
Disney’s remarkable run was powered by strong performance in the studio and entertainment business. The segment’s revenue increased by more than 25% YoY and operating income grew by more than 35% YoY in FY 2016. Four of the movies released in 2016 broke the $1 billion mark in world wide box office collections, with Jungle Book coming close at $966 million. And Disney has great content lined up for 2017. It has already released Dr. Strange which is having great success at the box office and has Rouge One, Cars, Pirates Of The Caribbean and other movies lined up. However, Disney doesn’t expect this segment to report strong growth in 2017 due to strong comparable numbers reported in 2016. The studio division topped $7.5 billion in a record collection in 2016.
Shanghai Disneyland will be another catalyst for Disney stock. Already 4 million people have visited Shanghai Disneylandin the four months since its opening. As we have discussed in our previous posts, the theme park has strong potential due to the rising middle class in China and its huge catchment area. The opening of Avatar Land at Walt Disney World will be another growth driver for Disney. Analyst’s expect Disney to post double digit growth in earnings over the next five years. (Also Read: Is The Market Sentiment Around Disney Stock Finally Changing?)
Disney reported a disappointing Q4, missing analysts estimates on both top and bottom line. However, the stock has gained 2% since the earnings. This is in contrast to previous quarters where the stock declined even after reporting a beat. This clearly indicates that the market sentiment around the stock is changing for the better. While concerns around the ESPN franchise still linger, they continue to decline. ESPN’s multi-year contracts for major sporting events will ensure that Amazon’s decision to foray in to live streaming business will have a muted impact on it.
Also, Disney’s pivot towards online streaming through BAMTech and deals with AT&T and Hulu will soften the blow from cord cutting. Strong line up of movies will ensure another great year for the studio division, though the growth may be limited.In addition to that, Shanghai Disneylandwill be a major growth driver. Analyst’s expect Disney’s yearly earnings to growth to be in double digits over the next five years. Disney stock continues to remain a good long term story.