The Walt Disney Co.'s (DIS) stock was nearly flat in early market trading despite a beat on earnings, as questions remain on specific segments, namely the company's shift to streaming.
Disney reported revenue of $15.303 billion that bested expectations of $15.161 billion, and adjusted earnings per share of $1.86 came in well ahead of $1.54 per share estimates.
"After a solid first quarter, with diluted EPS of $1.86, we look forward to the transformative year ahead, including the successful completion of our 21st Century Fox acquisition (FOXA) and the launch of our Disney+ streaming service," CEO Bob Iger told analysts on the earnings call Wednesday evening. "Building a robust direct-to-consumer business is our top priority, and we continue to invest in exceptional content and innovative technology to drive our success in this space."
The investments were heavily touched upon by Iger, being named as the company's main push in 2019.
"DTC remains our number one priority. Our corporate reorganization was designed to support our DTC efforts, while providing a greater degree of transparency into our investment and our progress in the space," Iger explained. "We remain focused on the programming as well as the technology to drive the success of our DTC business, and we're thrilled with the continued growth of ESPN+."
The momentum in ESPN+ so far has been strong, helped along by the addition of UFC content to kick off 2019, suggesting strong execution in streaming on Disney's behalf.
"ESPN+ now has 2 million paid subscriptions, double the number from just 5 months ago," Iger said. "ESPN+ operates on BAMTech's platform, which is proved to be reliably stable during peak live streaming consumption and easily handle the volume of more than 0.5 million people signing up in a single 24-hour period. This same technology will power Disney+ when it launches later this year."
Given the success of high-volume streaming like that seen with the company's first major UFC event, which included a champion versus champion fight between flyweight king Henry Cejudo and bantamweight's best TJ Dillashaw, adds credence to the reliability of the platform. Given WarnerMedia has had issues with HBO during the releases of highly-rated shows like Game of Thrones, this is a key competitive advantage.
Yet, this major shift does not come without caveats.
The flattish stock implication could be promoted by a drag from the large-scale capital expenditures necessary to kick start its competition with Netflix (NFLX) through Disney+, as well as the investment needed to gain further traction for its sports streaming platform.
That is not to mention competition from Amazon (AMZN) which is making its own push to dominate both OTT viewing markets.
"Rising digital losses, increased spending and execution risk in streaming could weigh against the market opportunity," Real Money Pro's Doug Kass said in his outline of why he remains cautious on the stock. "Like it or not, Disney is embracing the capital-intensive Netflix strategy."
Kass explained that he would advise investors to continue to avoid the long side of Disney given the question marks that remain on the streaming shift and the high investment necessary in the effort.
The arms race with Netflix will certainly create problems as it will necessitate the revitalization of the Hulu platform, which was recently majority acquired from Fox, as well as the launch of Disney+ programming.
The company is anticipating an operating income loss of $149 million on the segment, deepening a $136 million hit reported in the fourth quarter as the new initiative comes into view.
RBC Capital Markets analyst Steven Cahall estimated losses from the investment ramp to come in at $1.85 billion by 2020, adding that investment diverted from other segments will reverberate across the business.
He clarified that his estimates are significant due to the fact that he believes the company is underestimating the loss it will incur from the capital intensive push.
"We may learn of additional expenses associated with building out that Disney+ platform," the Action Alerts PLUS team, which is long Disney, acknowledged. "We believe this is largely expected and partially to blame for shares being unable to breakout to new levels."
Nonetheless, the team stated that while this move may provoke short term pressures on operating income and margins, it is an inevitable move based on the growing number of consumers cutting out their cable guy.
"We believe any additional investments will be worthwhile and that longer-term the company's DTC strategy is a move in the right direction given the ongoing cord cutting trend, a view bolstered this quarter by the strong momentum seen at ESPN+," the AAP team noted.
They reiterated their "One" rating, as a stock they would buy.
As the FOX deal does not close until the summer and streaming services are not detailed until after the first quarter's close, it might not be surprising that many investors are waiting for more information on the long term catalysts for the stock before buying in.
Timing is everything.
(Disney and Amazon are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells DIS or AMZN? Learn more now.
