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Debugging The Disney Misconceptions


Misconception #1: Buying Netflix could be Disney's only hope.

Misconception #2: Disney has failed to succeed at replicating Neflix's ability to get content directly to consumers" and that they need Hastings to succeed.

Misconception #3: A Netflix's acquisition would create long-term shareholder value and is the needed catalyst to the stock's appreciation.

The Misconceptions

  • One major misconception is that the ESPN viewership decline is the end of Disney (DIS) and that "buying Netflix... Could be Disney's only hope."

These arguments are taken from a Fortune article entitled, "The Case For Why Disney Should Buy Netflix." The article quotes Richard Greenfield whose suggestions for a Disney-Netflix merger has been quoted all over the web in the past week.

"Netflix is already a great friend of Disney, in fact, Iger has repeatedly acknowledged how they are in part responsible for Netflix's success. Disney continues to sell more and more content to Netflix spanning movies and television series, while at the same time struggling to get their own direct-to-consumer content business off-the-ground in the UK," Greenfield wrote. "Buying Netflix is an awfully expensive acquire, but it could be Disney's only hope." - Quote from BTIG analyst Richard Greenfield

To start with, the comment that "it could be Disney's only hope" suggests that Disney is dying as a company.

But as we showed in the previous article entitled, "Disney Is In Good hands," the notion that Disney is dying is far from the truth. First and foremost, we showed that all five segments of Disney have been growing revenues at an average of 22% y/y in the last five years alone. Disney is a ~$160 billion company that has been growing dividends at an average of 27% in the last 10 years and its stock price has appreciated by ~250% in the last decade compared to 58% for the S&P 500. These are not metrics of a dying or stagnant company.

Besides that, recent analyst coverage from Piper Jaffray upgraded Disney on March 3rd, 2016 from Neutral to Overweight. On April 8th, 2016, RBC Capital Markets initiated their coverage on the stock with a sector perform. In addition to that, a survey of 29 brokers by Thomson puts the mean price target for Disney at $108/share or ~10% upside - which we think is very modest.

In addition, according to Walt Disney's CEO Bob Iger during the Deutsche Bank conference on March 8th of 2016, the decline in ESPN subscribers was not different from what the company anticipated. As a result, ESPN took initiatives to strengthen their competitive advantage while anticipating a decline in its pricing ability.

"Let me first of all -- I think putting it in perspective a little bit, what we're seeing in the marketplace today is not that different than what we anticipated.... ESPN is always priced robustly -- our pricing would moderate, meaning we'd be able to take increases, but not at the rate that we were getting them before. And with that in mind it's actually one of the reasons why we thought about diversifying the company more...So what we thought we would do is strengthen our competitive position in the marketplace and we did that by licensing great sports for long-term periods of time, investing in our content, original and live sports, and investing in digital, which is -- essentially means not only giving ESPN subscribers an opportunity to watch ESPN on mobile...