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No, Black Panther Doesn’t Make Disney Stock a Buy

By Jeremy Bowman - Feb 27, 2018 at 8:09PM

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The entertainment giant has a blockbuster on its hands, but that doesn't change the structural challenges ahead of it.

There's no question that Black Panther is a phenomenon, both culturally and financially. The Disney-owned (DIS 0.22%) vehicle has raked in more than $700 million at the box office through its second weekend, and had the second-best second weekend of all time, behind only Star Wars: The Force Awakens.

The Marvel movie has resonated in particular with an audience that's long believed itself to be overlooked by Hollywood: African Americans. It's the first big-budget comic book-inspired movie to feature a black main character and a mostly black cast, and during its first weekend, 37% of viewers in the U.S. were African-Americans. The movie has also won praise from luminaries like former First Lady Michelle Obama and Oprah Winfrey:

Disney investors were celebrating too, as the move is likely to generate more than $1 billion at the global box office, and could bring in more than $500 million in profits after accounting for its $200 million budget and the take from theaters.

The poster for Black Panther

Image source: Disney

While the brand will deliver further income to Disney through a likely sequel, DVD sales, streaming rights, merchandise (like toys), and rides at theme parks, it's a mistake to buy Disney stock solely based on the movie's success.

Gone with the wind 

The problem with the movie business is that cash flow is inconsistent. The popularity of Black Panther will lead to a bumper quarter of revenue and operating profits for Disney, but after that much of the financial benefit from the movie is gone aside from brand extensions, licensing, and sales of residual products like merchandise. And even if Black Panther were to generate $1 billion in operating profit, that would still only move the needle a little for Disney, which generated nearly $15 billion in operating profit last year.

Investors should also remember that Disney regularly comes out with blockbuster movies. The latest iteration of Star WarsThe Last Jedi, brought in $1.32 billion at the box office, yet Disney's studio revenue and operating profit still fell slightly during the quarter it came out, as it lapped Rogue One and Moana and the company saw sales in its home entertainments segment slip.

Unlike rival Netflix (NFLX 0.41%), which can leverage a hit show or movie to create a lasting revenue stream from new subscribers, a hit like Black Panther comes and goes for Disney.

The cable problem 

Meanwhile, the success of Black Panther does essentially nothing to shore up falling revenue and operating profits in Disney's media and network division, which last year made up nearly half of its business. Profits in the company's media networks division fell 11% last year as ESPN continues to lose subscribers and advertising dollars and as broadcast networks begin to generate lower advertising revenues.

The decline of cable has been a structural problem at Disney for years now, but the company hopes to fix it by launching its own streaming networks. One service will come out this year, dedicated to sports content, and another will debut in 2019 based on Disney's other entertainment programming. If its acquisition of Fox is successful, it will also gain majority control of Hulu, essentially giving it a third service.

As my fellow Fool Dan Kline has pointed out, Disney has a nearly unmatched slate of intellectual property, including titles from studios like Pixar, Marvel, and Lucasfilm, as well as Disney itself, and it has a clever business model that allows it to parlay popular brands in video entertainment into secondary income streams like theme park rides and toys. There's no doubt that Disney is an impressive business, but the problem is that the structure that supports much of this entertainment is falling apart. Ticket sales at movie theaters in the U.S. peaked in 2002, and theaters have since relied on price hikes to squeeze more value out of moviegoers. A hit like Black Panther likely takes away ticket sales from other movies in what is essentially a zero-sum game. More importantly, the cable bundle is eroding -- streaming services like Netflix have grown more popular and begun replacing it.

Disney will no doubt have plenty of content to put in its streaming pipes, but the streaming model won't deliver the profits that cable has. Most streaming subscriptions cost $10-$15/month, compared to the more than $100/month Americans pay for cable, and they generally avoid advertising, crimping a valuable revenue stream for networks like Disney. The major players -- Netflix, Hulu (of which Disney is a 30% owner), and Amazon -- are all operating at a loss on a cash basis. Netflix is projecting $3-$4 billion in negative free cash flow this year; Hulu lost nearly $1 billion last year and expects to go $1.7 billion into the red this year; and Amazon spent an estimated $4.5 billion on content last year, mostly to attract new subscribers to its Prime loyalty program. 

If anything, Disney's entry into streaming may only intensify the arms race for talent and content that has led to such losses for the streaming providers.  Even on an accounting basis, Netflix, with 117 million global subscribers, made just $559 million in net income last year, a drop in the bucket for Disney.

Disney is stuck in a classic innovator's dilemma, forced into the unwelcome need to disrupt a model that's worked so well for it. And from an investing standpoint, even if Disney's streaming services are successful, the company won't get the same credit as a growth stock like Netflix.

The windfall from Black Panther is nice, but over the long run, it will do little to help Disney deal with the challenges ahead as it launches its own streaming networks.


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