Disney's (DIS) recent successes at the box office are certainly building a bullish near-term case. But long-term investors must recognize the bigger picture on how Disney's key content plays into more promising projections for upcoming streaming service, Disney Plus.
"We believe the multiple will be revalued if DIS is successful transforming itself" into a direct-to-consumer provider, Loop Capital analyst Alan Gould said.
Success, Gould added, will initially be measured by Disney Plus subscriptions, which he believes will beat the consensus of approximately 10 million in the first year.
With the amount of options for streaming products proliferating, consumers will be forced to pick and choose the streaming products to spend on, as analysis suggests that consumers' wallets are not fat enough to sustain each current player.
For Disney, the idea is that customers will be moved toward the platforms that present the most compelling content. If spending at the box office can translate to at-home viewing, this makes a strong case for Disney to remain a top competitor, able to quickly gain on Netflix (NFLX) and hold off burgeoning competitor Amazon (AMZN) .
"Stepping back and admittedly taking the long view, investing in Disney shares is a play on the durability of its IP," a team of Morgan Stanley analysts said in a recent research report, adding that, "Encouragingly, consumers are voting with their wallets today."
They are spending an estimated $15 billion to $20 billion a year for movies and TV entertainment "that will ultimately make its way to Disney Plus," wrote the Morgan Stanley analysts.
The trend of increased interest in Disney entertainment reflected in record box office revenue, combined with the trend of cord-cutting, especially among younger consumers, makes the bull argument an easy one to make in the firm's view.
"We believe Disney Plus ramps faster than Netflix," the team surmised. The over-the-top "market is much more developed today than 12-13 years ago and Disney brings known brands and IP to the marketplace."
The existing IP for Disney is key as well, given it will not need to spend as big on new productions as Netflix will. As Netflix contends with substantial debt and continues to call on high yield debt markets, its start from a lower base is a worry that Disney simply does not have to deal with. The strong comparative balance sheet at Disney will also allow it to keep costs lower and maintain its typical marketing spend.
In addition, as Netflix scrambles to replace the properties that drive the most viewership on its platform, including "The Office" and "Friends," each property on a Disney platform is owned by Disney. As such, there is no noise on the subject.
Valid concern remains, however, that Disney is not a typical direct-to-consumer company and some are skeptical of its ability to keep up with technology. But it is worth noting that the company already has strong over-the-top experience through its 30 million Hulu and ESPN+ subscribers.
"We believe Disney can benefit from leveraging its global footprint and brand awareness to effectively target the 1bn+ consumers that it identifies as people strongly engaged in its content," the team at Morgan Stanley said. "Its BAMTech acquisition is intended to serve as the foundation of the tech behind Disney Plus, although our visibility into the value of that foundation is admittedly low."
The subject of international penetration may be one of the most important aspects of the streaming battle, as encouraging viewership from emerging middle classes in growing nations like India may be more important than North American performance in short order.
Noting the trend, Netflix has built much of its growth case on continued expansion into India.
"We've been seeing nice, steady increases in engagement with our Indian viewers that we think we can keep building on," Netflix CEO Reed Hastings said on Thursday evening. "Growth in that country is a marathon. So we're in it for the long haul, and we're seeing nice steady progress."
The company also announced a plan to roll out a lower-priced mobile-screen plan in the country during the third quarter to encourage engagement from consumers with less cash.
However, Disney has quietly stacked the deck in the region, bolstered by the addition of India's largest broadcaster, Star India, in its Fox (FOXA) Acquisition.
According to a CNN research report, Star India already reaches 700 million viewers in India, or more than twice the U.S. population. The same report cited Amazon Prime viewership at just 11 million and Netflix at a paltry 5 million.
The boom of smartphone usage and engagement with apps should continue to be a strength for Disney, as HotStar, the mobile app subsidiary of Star India is by far the best-positioned app in terms of engagement in the region right now.
The only real downside to Disney's ambitions are the side-effects that cord-cutting has on the company's interests in DVD sales and cable television, each of which would necessarily be tempered by a strong shift towards dropping cable.
Essentially, the question mark concerns the degree to which earnings will be eroded by cutting out licenses to movies through third parties, like Netflix, and reducing home video sales, as well as impacts on the company's cable channel.
While analysts have noted these are indeed valid concerns, the long-term opportunity for investors should outweigh these near-term earnings headwinds.
"We believe the market has often overstated the risk and underappreciated the reward of the transition to streaming," Morgan Stanley's research report states. "While investors are focused on the risk of home video or theatrical cannibalization, what should also be considered how much consumers already spend on Disney IP, how replacing third-party distribution and owning the consumer relationship has incremental financial and strategic benefits to Disney, and other growth drivers for the core business notably Parks, Consumer Products, and Star India that underpin consolidated EPS growth."
"Disney has never been a direct-to-consumer media company and it is not at its core a technology company. Its BAMTech acquisition may have given it some technology reliability, but it will need to innovate and invest in tech infrastructure and talent for years to come," the team acknowledged. "But the opportunity, in our view, is Disney's to win or lose as it brings unrivaled brands and consumer awareness of its content to the market."
The end of 2019 will be pivotal for investors pinning hopes on a bull case as the remaining slate of blockbuster films hits theaters and the long-awaited release of its streaming service arrives.
Given the dynamics, it could pay to stay tuned.
Amazon and Disney are holdings in Jim Cramer's Action Alerts PLUS member club.