Don’t sleep on The Walt Disney Company (DIS). There are now tons of reasons to expect 2018 to be a magical year for the entertainment and media conglomerate.
While concerns about ESPN still exist, Disney management, assuming they can seal the deal for 21st Century Fox’s (FOX) assets, has begun to change that narrative. What’s more, Disney’s 2018 revenue and earnings estimates are still low, suggesting the market has not accurately priced the company’s ability and willingness to successfully reset its business.
For now, let’s first go over the benefits of the Fox deal, where both media giants are reportedly finalizing a deal where Disney would acquire Fox’s film and TV production assets. Terms of the deal have not been disclosed. But CNBC has reported the deal could fetch more than $60 billion, while Bloomberg noted that the marriage could be announced as early as this week.
Why would Disney pay such a ransom? The way I look at it: It can’t afford not to. If not Fox, certainly it needs something comparable.
In this case with Fox’s assets, Disney sees a way to make a major leap to narrow the the streaming-video content gap with Netflix (NFLX), where video-on-demand has been Netflix’s major source of dominance. And this dominance has been heightened by consumers’ unwillingness to pay for cable and satellite and bloated bundles of TV channels they don’t watch. It’s for this reason Disney stock, which has risen just 1.5% year to date, versus the 18% rise in the S&P 500 index, while underperforming the market over the past several years.
This will all change with Fox in the mix. Disney, which already owns 30% of Hulu, would then — by virtue of Fox’s 30% stake in Hulu — become majority owner in arguably, the platform that competes more closely with Netflix. And combined with Disney’s rich library of content and its own standalone streaming efforts, Disney would then see significant revenue growth from its future streaming media services.
How fierce has the Netflix rivalry with Disney become? During Disney’s Q3 earnings call with analysts, CEO Bob Iger — when asked about the pricing of Disney’s streaming service — mentioned Netflix by name, suggesting a strategy to undercut Netflix on price. “It will be substantially below Netflix because we’ll have substantially less volume,” Iger responded to inquiry.
And to say nothing about the international subscription growth Disney can enjoy by virtue of Fox’s 40% interest in London-based Sky PLC, which operates on-demand internet streaming media, broadband and satellite broadcasting services. To be sure, taking down Netflix is not as easy as it sounds. From Amazon (AMZN), Apple (AAPL) and Google’s (GOOG , GOOGL) YouTube, Netflix has taken everyone’s best punch and not only has it survived, but thrived.
With Fox, however, Disney is buying an opportunity to make incremental market share gains in a streaming video segment where it once had no roots. And with the stock still trading on the assumption Disney can’t grow, investors should pounce on the company’s streaming potential and its ability to create accretive growth from any of Fox’s assets it acquires.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.