By: Steve Smith
I know being bearish on Disney (DIS) might cast me as a villain but I have to got to call it like I see it. And I think it’s stock is due for a pullback and I will be employing a limited risk option strategy to establish a bearish position that will profit on a pullback.
To be clear, I’m very bullish on Disney (DIS) in the long-term; they have so many solid revenue streams from movies, parks and cruise ships, merchandising and IP that gives them many levers to pull.
The roll out of its streaming service will ultimately be successful but I think despite the strong initial response it will be a bumpy and initially unprofitable road. Some of the issues it faces in regards to streaming are:
- Good content isn’t enough to monetize content at high rates of return anymore. With deep pocketed competitors such as Amazon (AMZN), Apple (AAPL) and the incumbent Netflix (NFLX) which all have and will continue to spend inordinate amount of money creating quality content. Even though Disney has possibly the deepest library it is new content that brings in keeps subscribers and the cost of new productions are being driven higher and the differential in quality is narrowing.
- Streaming distribution lacks the structure to raise prices and retain subscribers like the cable model. While much was made of the Disney+ signing up over 10 million subscribers in the first 24 hours it needs to be pointed out nearly half of those came through deals with carriers such as Verizon (VZ) which is subsidizing a free year for people on their wireless plans.
- Even if Disney were successful in creating a streaming business, the market is not pricing in the effects of cannibalization and increasing competition on their overall profitability. Disney makes at least $15 per month per cable subscriber from carriage fees. They also generate another $5 per subscriber from advertising. With content costs mostly fixed, every streaming subscriber Disney poaches from cable will be a net negative as their streaming offers are currently priced at less than $10 per month.
But put all that aside as this trade is really about…
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