Disney (NYSE:DIS) is a business that is firing on all cylinders. From blockbuster box office results to record-setting attendance at its theme parks, Disney has been delivering outstanding operational performance across its business segments. But no business is invincible, and all businesses face potentially damaging threats. In that regard, here are three major risks facing Disney today.
Future movie releases could disappoint
Disney's studio division is the foundation on which the company is built. Disney relies on a steady stream of strong movie results not only to drive box office revenue, but also to fuel sales in its consumer products segment and to boost traffic at its theme parks and resorts. Expectations are high for Disney's upcoming slate of films, and should some of its major movie franchises underwhelm audiences, Disney's stock could suffer.
That said, Disney's business is diversified enough to withstand the occasional box office flop. While its stock would likely take a hit if a major film were to come in below Wall Street's expectations, such an occasion could present an attractive buying opportunity for long-term investors. That's because Disney owns a treasure trove of many of the most valuable storylines and characters in the industry. So while a poor performance could ding near-term results, successful future movie releases could help right the ship.
What's more, Disney's current slate of new movie releases looks particularly strong. Just this past weekend, Avengers: Age of Ultron delivered the second-biggest domestic opening in history with $187.7 million in U.S. box office receipts. Even more exciting is that the current record, held by Disney's first Avengers film, stands ready to be shattered by Star Wars: The Force Awakens once it hits theaters in December. In fact, some are even predicting that the Disney-owned franchise could become the first $3 billion film in history.
A raging epidemic
Back in October, Disney's stock plunged as fears surrounding the Ebola outbreak caused investors to unload their shares. Many investors feared that vacationers would avoid Disney's crowded parks and resorts due to concerns of being infected with the disease. Fortunately, a coordinated global response was able to keep the outbreak in check and Disney's share price soon recovered.
Any type of serious outbreak of infectious disease would likely result in a sharp sell-off in Disney's shares. The company's parks and resorts segment is particularly exposed to such a threat, and many investors would likely sell first and ask questions later. This is an ever-present risk, although -- for the sake of humanity -- let's hope it remains a low probability event.
The end of cable as we know it
The crown jewel of Disney's empire -- ESPN -- benefits tremendously from the bundling of cable packages. In effect, the fees Disney receives for ESPN are subsidized by millions of cable customers that might not otherwise subscribe to the network. The move toward a la carte programming is accelerating, with cable providers such as Verizon (NYSE:VZ) beginning to unbundle some of their offerings. Disney is trying to slow the tide, and is currently suing Verizon for allegedly violating its carriage agreement.
This is a war that Disney investors should watch closely. The unbundling of cable packages is a trend that even the mighty Disney cannot halt. Long-term, I see a scenario where Disney is forced to offer ESPN as a separate option as cord-cutting accelerates, albeit at higher prices than it currently receives from cable providers to offset much lower subscriber numbers.
The question is: What effect will this have on ESPN's revenue? If more people subscribe to a stand-alone ESPN service than analysts are currently projecting, or Disney is able to charge a higher price than anticipated, the impact to Disney's business could be less than feared. Such a situation would be cheered by investors and would remove a major overhang on Disney's stock. On the other hand, if the unbundling of cable leads to a mass exodus of ESPN subscribers that Disney is unable to offset with price increases, Disney's profits could take a significant hit. This is the major risk I see to an investment in Disney today, and it's an area that investors may wish to monitor closely.
Joe Tenebruso has the following options: short January 2017 $100 puts on Apple and long January 2017 $90 puts on Apple. The Motley Fool recommends Apple, Google (A shares), Google (C shares), Netflix, Verizon Communications, and Walt Disney. The Motley Fool owns shares of Apple, Google (A shares), Google (C shares), Netflix, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.