In Age Of Digital Platforms, Disney's Direct-To-Consumer Strategy Represents Major Opportunity

Despite another solid quarterly report, shares of Walt Disney Co DIS opened Wednesday’s session down more than 2.7 percent.

Disney beat expectations on EPS, reiterated its 2017/2018 guidance and raised its share buyback program by more than 25 percent, but traders seem to be focused on the company’s revenue miss and weakness in its ESPN business. Disney reported that it has now lost 12 million ESPN subscribers in the past six months.

Still, Credit Suisse analyst Omar Sheikh says Disney investors shouldn’t sweat ESPN’s performance during this transitional period for Disney. Credit Suisse cut its full-year EPS estimates by 1 percent following Disney’s earnings report, but Sheikh points out that the firm is still projecting 15 percent EPS growth from Disney in 2018.

Sheikh says Disney has the potential to create major value with its direct-to-consumer strategy.

“We believe the company has substantial opportunities to build a business of scale over the next 2-3 years, leveraging its wholly-owned and licensed IP in movies, entertainment and sports, which could both exploit demand for under-monetized content and open up new opportunities for targeted advertising,” Sheikh explained.

Related Link: Why Netflix Could Be A Top Prospect For Apple

He notes that recent weakness in domestic advertising is likely only temporary ahead of a coming wave of “digital” multichannel video programming distributors.

While Disney currently trades at a 46 percent premium to peers based on forward PE, Sheikh believes the company is uniquely positioned to benefit from its massive content library.

Credit Suisse maintains an Outperform rating for Disney and a $125 price target for the stock.