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Why ESPN's Troubles Present a Buying Opportunity for Disney Stock

By Bradley Seth McNew - Apr 7, 2016 at 4:00PM

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ESPN's cable subscriber drop has put a cloud over Disney's stock.

The "Watch ESPN" app on Windows 8. Photo: ESPN.

Shares of Walt Disney Co. (DIS -4.19%) have been volatile in recent months, following the company's Q3 earnings that reported declining ESPN cable subscribers. The worry is not without merit: ESPN is Disney's largest property within its Cable Network division. By the end of fiscal 2015 in November, ESPN had lost 7 million subscribers, down to 92 million total.

After a few months of ups and downs, Disney's stock price is now down about 20% from its early August high of $120. This volatility has presented long-term investors with a buying opportunity on this well-performing company. ESPN is proving now that it has plenty of opportunity to make up for traditional cable subscriber losses and that its new strategies for doing so will actually benefit Disney shareholders in the long run. Here's how Disney is partnering with other innovative companies for new streaming options and also building its own digital infrastructure for even more future growth.

ESPN's many partner opportunities 
ESPN is already available on multiple platforms other than traditional cable. ESPN content has been available to stream on DISH Networks' Sling TV for a little more than a year, with new options added throughout that time. During the most recent earnings call, Disney CEO Bob Iger noted that ESPN subscriber rates have already started to increase again, which he noted was helped by the gain in Sling subscribers. ESPN is also available on the Sony PlayStation Vue, which was just launched nationwide in Q1, and ESPN is one of the featured programs in Verizon's newest mobile TV offerings. 

As other companies with their own massive media streaming audiences also seek to expand their TV and video services, there are plenty more partner opportunities for ESPN to be streamed without traditional cable. And let's not be fooled (little "f") into thinking that cable is suddenly going away. Even with the cord-cutting trend gaining traction, there are still millions of people sticking with traditional cable, meaning that ESPN will have the benefit of maintaining many millions of traditional subscribers while also having the chance to reach new audiences through these partnerships that could mean more subscribers than ever before in the years to come.   

The power of ESPN digital
Disney is also focusing on providing ESPN directly to consumers through digital services such as and various mobile apps. Think ESPN digital is a fringe service? Consider that more than 6.5 billion minutes were spent on the various ESPN digital properties in January alone, with 884 million total visits from 67 million unique visitors. That amount of time made up nearly 30% of all time spent watching sports online, which was about 50% more than the No. 2 competitor. 

The ESPN mobile app. Photo: ESPN.

While much of this is still one-off content, instead of full channel streaming similar to traditional cable channels, Iger said in the most recent earnings call that "some form of direct-to-consumer" streaming is an option Disney is pursuing. If Disney can make watching ESPN on digital platforms as seamless as watching on traditional cable channels, that could have an even bigger impact than streaming partners, as it could open up to the millions of sports fans worldwide. 

The true worldwide leader in sports
What will makes this digital strategy important is the growth potential for ESPN worldwide. Last year, Disney inked a deal with Sony's subsidiary Multi Screen Media to offer multiple ESPN sports channels, a new website, and a dedicated app to Indian sports fans. Then in China, where basketball has become incredibly popular in the last decade, Disney has partnered with local media company Tencent, which will help to provide content to Tencent's nearly 1 billion digital users. 

Disney is hard at work making sure it stays the dominating force in important markets such as China and India, and it will continue this strategy to offer its content truly worldwide. Disney's international subscribers have risen at impressive rates recently, up from 115 million to 127 million in the most recent quarter year over year, and is likely to start growing even faster thanks to these global partnerships and focus on digital. 

Is there still time to be greedy while others are fearful?
Getting in on Disney at its recent low point around $90 following those initial concerns about ESPN's decline would have been an opportune time to do so. However, even with the small return since then, this still looks like a great entry point for a great company that continues to fire on all cylinders in its other segments and still has plenty of long-term potential for ESPN specifically. At just 16 times next year earnings estimates, Disney stock still looks like a great play.

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