Captain Obvious would say Disney results were sub par even as big media is reporting mixed results.
DISCLOSURES: I have a PUT Position in Netflix shares. On August 8, 2017, I increased my position by 1/3 owing to comments made by CBS regarding its APTV Subs which I viewed as a competitive threat. Owing to the nature of options the position can change at any time. People that know me and follow TenXResearch are aware my long term put strategy is not a new fact-set. I have the upmost respect for Netflix and its management but at $70 billion with no free cash flow many traders would view Netflix as expensive.
- Disney missed the consensus on FactSet on Sales, Ebitda and Earnings.
- The miss is troubling because DIS had the NBA Finals in the quarter and did not benefit like CBS from sports. The bright spot was theme parks which grew by double digits but even with a promising summer movie slate Disney Productions missed.
- Disney is expanding its stake in BAM Tech paying $1.58 billion for a control stake while baseball and hockey will still own stakes.
- In case you have been living in North Korea, Disney is cancelling its Netflix Deal in 2019.
- The Disney Deal is in the $450 million to $600 million annual revenue range roughly speaking. Marvel, and Lucas films may add more to the figures.
- This Disney Strategy is high risk and high reward. Looking at the BAM Tech back end Disney can potentially do everything You Tube does and but they are 2 years behind AMCX and CBS in this APTV transition.
- Disney shares are not inexpensive this company has missed revenue estimates in 5 out of the last 6 quarters according to figures on FactSet.
- Providing more color on the results Disney Taxes were 4% lower so the miss is pretty wide.
Given Apple is a potential bidder for DIS especially if we get tax re-patriotion I would view DIS shares floored at the $85 level.
So why is Disney announcing all this now? It is about the movie schedule. Netflix is the best Company in the history of marketing, that is not hyperbole. Disney has a robust movie schedule coming up with Toy Story, Avengers, and 2 Star Wars movies and the deal with Netflix could devastate DIS Box office.We call the canibalization of partner revenue Netflixing. Disney is getting ahead of the NFLX hype by announcing its divorce ahead of time.
Netflix
Let me talk my book, I am short the stock.
- In 2012 the Disney Netflix deal was viewed as a Good Housekeeping Seal of Approval on Netflix’s financials.
- Cancelling the deal undercuts that notion just a little bit today as the deal sunsets in 2019. However, Netflix appears to be OK for now.
- While Netflix may save some money, not paying up for Disney content.; Netflix will have to replace Disney content.
- Replacement will not be cheap.
- Thus Netflix buying MillarWorld as a step in the process and I like the deal.
- I would like the deal less if it does in fact not include the Kingsman and other titles that have gross over $1 billion worldwide. Then the deal is more speculative with no established tentpoles.
- Ultimately, if Netflix losses the Marvel and Star Wars content they are in a tough position with $13 billion in content liabilities excluding Disney.
- Ultimately when combined with the MillarWorld Deal the probability of Netflix getting taken over by Apple or Disney just went from 40% to 5%.
- So who are left? Softbank and Alphabet losing the Disney Content just made the whole M&A market for Netflix less competitive and the MillarWorld deal may signal Netflix cannot be sold now. BTW Netflix should buy AMCX but they never listen to me.
How do you trade this?
- I would swap Disney Shares for CBS and AMCX if DIS shares are too risky for you.
- Alternatively if you think Apple is a buyer of DIS write the $90 puts.
- Netflix may be a short but I reentered mt short is at $186 a share but it is not an easy short but at 200x low quality earnings a small position could make sense for risk takers.
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