Shares of Disney (DIS 0.31%) have fallen about 10% this year due to ongoing concerns about cord cutters gutting its media networks division, which generated nearly half of the company's operating income over the past nine months. The main problem is that ESPN, whose live sports broadcasts were once considered immune to cord cutting, has been consistently losing subscribers over the past few years.
Image source: Pixabay.
Those concerns are certainly valid, but I believe that they overshadow three key growth opportunities for the House of Mouse.
1. OTT opportunities
Disney recently announced that it would buy a 33% stake in Major League Baseball's BAMTech streaming media unit, which would serve as the foundation for a new OTT (over-the-top) offering for ESPN. This means that consumers can choose to subscribe to a stand-alone streaming ESPN service, similar to Time Warner's HBO Now, without a pay TV subscription.
Disney's main networks (ESPN, ABC, Freeform, and the Disney Channels) are also included in many OTT "skinny bundles", which stream a smaller set of popular channels over the Internet at lower prices than traditional pay TV subscriptions. Dish Network, for example, signed such a deal with Disney to carry the company's core channels on its own OTT service two years ago.
Disney recently announced that AT&T will also bundle its main channels into DirecTV Now packages. And Disney owns a 30% stake in Hulu, which is developing OTT skinny bundles, which will likely include Disney content. These OTT platforms represent ways for Disney's media business to thrive in a cord cutters' market.
2. Chinese theme parks
During the third quarter earnings call, CEO Bob Iger called the opening of the Shanghai Disney Resort on June 16 "a spectacular success by any measure", noting that the park had already hosted over a million visitors with hotel occupancy rates at 95%. Iger also noted that the first expansion of the park is already under construction, giving it "plenty of room to add new lands, attractions, hotels, and more."
Shanghai Disney Resort. Image source: Disney.
Chang Jiang analyst Li Jin estimates that Shanghai Disney will attract up to 50 million visitors per year, which nearly matches the combined attendance of 54 million at Walt Disney World's four Orlando theme parks last year. By comparison, Hong Kong Disneyland hosted just 6.8 million visitors in 2015. It's highly likely that as China's middle class grows, Disney can eventually expand its parks deeper into the country's urban centers.
But Disney isn't the only theme park operator eyeing China's middle class. The massive real estate and media conglomerate Dalian Wanda unveiled plans for 15 new theme park and entertainment projects across China to counter Disney's expansion. Comcast's NBCUniversal also plans to build new Universal Studios theme parks in Beijing, Moscow, South Korea, and Dubai.
3. Movie franchise growth
Disney patiently cultivates its film franchises in the Marvel, Pixar, and Star Wars universes to ensure that they deliver blockbuster returns year after year. That's why it lets Kevin Feige, the president of Marvel Studios, dictate the direction of all Marvel films to ensure that they deliver connected stories that remain faithful to the source material.
That's a stark contrast to Time Warner, which lets individual directors dictate the tone of its comic book films. That approach, combined with a rush to build a Marvel-like DC film universe in a much shorter time frame, yielded critically panned films like Batman v. Superman and Suicide Squad.
Star Wars: Rogue One. Image source: Disney.
With Pixar, Disney strikes a careful balance between launching sequels to beloved series like Toy Story with new films like Inside Out. As for Star Wars, Disney is gradually expanding that cinematic universe with new stand-alone films, including the Rogue One spin-off, alongside bi-annual releases of the new trilogy.
These strategies ensure that Disney's studio entertainment unit delivers predictable year-over-year growth -- a rare strength among most movie studios. These franchises also cast a halo effect across Disney's other businesses, like its theme parks and consumer products divisions with new attractions, shows, toys, and other goodies.
The key takeaway
Disney stock will likely remain under pressure from cord cutting concerns over the next few quarters. But I'm not in a rush to sell, since the stock trades at just 17 times earnings -- a discount to the industry average of 19 for diversified entertainment companies.
Over the long-term, I believe that Disney will make a successful transition toward digital platforms and OTT skinny bundles, greatly reducing the threat of cord cutting. After that happens, investors will turn their attention to its higher-growth theme park and movie businesses -- which both still have plenty of room to run.
