Walt Disney Co ’s latest release, Star Wars: The Force Awakens has smashed almost every Hollywood opening weekend record, raking in over $500M in global ticket sales. Disney’s stock, however, has gone in the opposite direction, shedding close to $10B of market cap in the past one week.
So why are investors so pessimistic about a stock that has just delivered such a huge blockbuster? Analysts attribute the latest stock slump to the recurrent concerns about Disney’s cable operation in general, and ESPN in particular.
Walt Disney Gets its Movie Script Right
Star Wars undoubtedly has had a very strong opening, with industry watchers pegging it to continue racking up record sales. Add to that the five more movies left in the franchise, and the inevitable merchandising blitzkrieg.
In fact, some box-office analysts say that Walt Disney’s $4B acquisition of Lucas Films in 2012 was in all likelihood the best media deal in recent history. If Disney manages to maintain the current Star Wars momentum, it could end up recouping the buy price from the revenues generated from a single movie.
Besides Lucas Films, Disney’s other big acquisitions – Marvel and Pixar – have also turned out to be roaring successes. Marvel’s comic-book empire has spawned its own mega-hit franchises such as The Avengers. Pixar, meanwhile, has developed some of the hottest animated features of all time.
Walt Disney Can’t Soothe Wall Street’s ESPN Nerves
But all the hoopla surrounding Walt Disney Co ’s recent movie success seem to be overshadowed by investor concerns about the ongoing decline in cable revenue. ESPN is the chief culprit. The network was presumed to be immune to the shifting digital trends because of its stranglehold on live sports. But that proved to be a myth, as ESPN continues to be hurt by cord cutting.
BTIG analyst Rich Greenfield says the problems at ESPN and the loss of cable subscriber revenue have more than outweighed the gains made from Star Wars.
Walt Disney gets close to 45% of its operating profit from its cable unit. Movies are great for P.R., but they just don’t contribute as much to the bottom line. ESPN has been bleeding subscribers, losing almost 7M in the past two years. That adds up to roughly $650M less in subscriber fees, a bulk of which is pure profit. Greenfield concludes that even if Star Wars makes in excess of $2B, it will barely offset the drop in cable revenue.
“The proportion of revenues that Disney’s been deriving from its cable nets, including ESPN, has been declining relative to the studios,” Rich Tullo, senior analyst at Albert Fried & Co., told CNBC.
Updated 16:49 EST: Mr Tullo of Albert Fried reached out to us to clarify his position on Disney. He said “Disney Cable Net’s contribution to overall revenue has not been growing as fast as Studio revenue. Thus if hypothetically cable net revenue were to decline 3% the decline $600 million would be more than offset by growth in studio revenue $1.5 to $2 billion in my book, high margin studio revenue ($900 million to $1.5 billion net) is positive every day of the week.”