Walt Disney Co (NYSE: DIS) investors have a lot to digest following the company’s $52 billion buyout of most of the TV and movie studio assets of Twenty-First Century Fox Inc (FOXA). But as exciting as the Fox deal is, Disney’s streaming rollout may keep the stock under pressure for much longer than investors realize.
According to Bernstein analyst Todd Juenger, Disney is facing a lot of potential earnings headwinds in coming years, starting with the fact that the Fox assets have historically been valued at a lower earnings multiple than Disney’s. On one hand, Juenger says the market could assign a higher value to these assets now that they belong to Disney. But the new assets may simply compress Disney’s overall earnings multiple.
Regardless, Juenger says Disney’s earnings will take a hit.
Both Fox and Disney currently generate meaningful revenue by licensing their content libraries, but Juneger says Disney will lose $7 billion per year in high-margin licensing revenue if it plans to offer its content exclusively on its new streaming service.
At the same time, he says Disney will need to invest roughly $5 billion per year in content, customer acquisition and technology related to its direct-to-consumer service.
Juenger says these costs, which total between $1 and $2 in annual earnings per share for Disney, are not yet included in Wall Street earnings estimates.
“We expect EPS estimates to come down significantly,” Juenger says.
Fortunately, Juenger says Disney’s potential $1 EPS boost from tax reform is also not included in most Wall Street forecasts either.
At an average revenue per user of $8, Juenger estimates Disney will need more than 50 million subscribers to break even on its streaming service investments. By comparison, it took Netflix (NFLX) 10 years to hit the 100 million subscriber mark.
“There are strong arguments Disney will get there faster, but it will still take many years,” Juenger says.
In the meantime, potential upside in Disney’s stock may require earnings multiple expansion. Disney stock currently trades at a modest forward price-earnings ratio of 16.7.
Bernstein isn’t…
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