I’ve said it before, and I’ll say it again. Buy Disney (NYSE:DIS) stock in 2019 to benefit from the positive catalyst of the company’s streaming offering.
The thesis is simple. Calendar 2019 will the year that Disney breaks through in streaming. The mainstream emergence and widespread adoption of the company’s streaming services, ESPN+ and Disney+, will turn Disney’s cord-cutting headwind, into a streaming-growth tailwind. This pivot will dramatically improve investors’ sentiment towards Disney stock, add significant clarity to the company’s long-term growth outlook, and enable Disney stock to break out of its multi-year, sideways trading range.
This thesis just became much more powerful. That’s because Disney’s ESPN+ streaming service is now the exclusive provider of Ultimate Fighting Championship (UFC) pay-per-view (PPV) events.
UFC PPV events are a big deal. They average around 500,000 viewers per event, with the big events drawing in 1 million-2 million-plus viewers.
Now, all those UFC fans will need an ESPN+ subscription in order to watch PPV events in their own homes. That means millions of new subscribers will sign up for ESPN+ and add millions of more dollars to Disney’s top line through shared PPV revenue.
The UFC deal in and of itself won’t be a needle mover for Disney stock. I think it will add about 0.5% to the company’s total revenue. But it is the first of many steps which show that ESPN+ has tremendous long-term growth potential, and that long-term growth potential can become a major needle-mover for Disney stock.
So the idea of buying Disney stock in 2019 to benefit from the company’s streaming products remains as strong as ever today. That’s why I’m doubling down on my bull call on DIS stock.
ESPN+ Scores a Big Win
UFC fans are exceptionally loyal, and truly love watching UFC events. So most them will subscribe to ESPN+ to watch UFC PPV events without thinking twice. Conservatively, I estimate that ESPN+ will obtain roughly 1.5 million new subscribers in the wake of the UFC deal. At $5 per month, that would add $90 million per year to Disney’s top line.
Meanwhile, assuming 500,000 viewers per event and an average price of $60 per event (with 12 events in a year), DIS would obtain total PPV revenue of $360 million. UFC normally takes a 60% cut, so that should translate into just under $150 million in PPV revenue for Disney. That’s a roughly $250 million revenue opportunity for Disney as a result of the exclusive UFC PPV deal. That’s a drop in the ocean for DIS. It’s less than 0.5% of the company’s $60 billion of projected revenue this year.
But this deal isn’t about the direct PPV and subscription revenue that Disney will obtain. Instead, this deal is about ESPN+ taking constructive steps towards becoming a major sports streaming player. Today, it’s an exclusive UFC PPV deal which brings in 1-2 million new subscribers. Tomorrow, it’s exclusive agreements to stream certain college sports, which will bring in millions of more viewers. The next day, it’s exclusive agreements to stream certain pro sports, which will bring in millions more viewers.
In other words, ESPN+ appears to be on a path to winning exclusive streaming rights for sporting events. The more streaming rights that ESPN+ wins, the more ESPN+ will grow, because sports have sticky viewers. So Disney could potentially use streaming subscriptions to offset all of the revenue it will lose from cord-cutting.
The Long-Term Upside From Streaming Is Compelling
Ultimately, Disney’s streaming opportunity is huge.
Roughly 60% of Americans consider themselves to be sports fans. There are nearly 130 million households in the U.S. Thus, there are roughly 80 million households in the U.S. in which one or more people watch sports.
If DIS can leverage its exclusive streaming partnerships to turn just half of the sports households in the U.S. into ESPN+ subs, that would equate to 40 million subscribers to the streaming service. Prices presumably would go up as ESPN+ obtains more exclusive streaming partnerships. At $10 per month, 40 million subscribers would equate to nearly $5 billion of annual subscriber revenue.
All of a sudden, the needle is moving for Disney stock, since nearly $5 billion represents almost 10% of Disney’s current revenue base.
Disney+, the company’s upcoming entertainment streaming service, could be even more lucrative, given its higher subscription prices and higher number of potential subscribers. It’s true that it will face tougher competition, thanks to Netflix (NASDAQ:NFLX), Amazon (NASDAQ:AMZN), and others.
But, as shown by Disney’s box-office domination, consumers have time and time again expressed a willingness to pay to see Disney’s content, even in the era of robust streaming consumption. Consequently, Disney’s streaming service will be able to effectively compete with the other streaming services once it has had time to ramp up its content.
Overall, then, Disney’s financial results can be meaningfully boosted by its streaming services. That’s why buying Disney stock ahead of this company’s big streaming initiatives makes sense. If Disney fully capitalizes on its potential streaming opportunity, cord-cutting fears will be put to rest,, waking up the bulls and causing Disney stock to break out from its multi-year, sideways trading range.
The Bottom Line on DIS Stock
Disney is making aggressive and promising moves in the streaming space. Cumulatively, those moves improve Disney’s long-term growth outlook. As a result, the outlook of Disney stock will continue to rise in 2019, enabling DIS stock to head higher.
As of this writing, Luke Lango was long DIS, NFLX, and AMZN.
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