What's Ahead for Disney (NYSE: DIS)

Brit Ryle

Posted August 10, 2023

Ever since sports betting was legalized in 2018, I’ve wondered what Disney’s (NYSE: DIS) plan would be. After all, it owns the ESPN network, and there’s probably no better platform for sports betting than ESPN…

The question, of course, is how would Disney embrace the degenerate gambling crowd without tarnishing its family-friendly image? (Dear Degenerate Gamblers: Just kidding about that degenerate thing.)

Well, for starters, Disney didn’t try to make a big splash into the sports betting market. Probably better to let the hype die down a little, wait for people to get used to Kevin Hart and Jamie Foxx touting online sports betting before making a move…

In 2020, Disney partnered with both DraftKings and Caesar’s to put ads for both on the ESPN app, and of course, ran their TV ads. But it didn’t try to come right out and brand ESPN as a platform for sports betting. 

Well, that changed yesterday, when Disney announced a $2 billion partnership with Penn Entertainment (NASDAQ: PENN) that will see Penn’s Barstool Sportsbook app changed to ESPN Bet. 

Penn gets $1.5 billion cash, spread over the next 10 years. Disney gets $500 million in warrants for Penn shares. I expect there’s some kind of a revenue sharing agreement in place too, but I did not see details of it in the reports I’ve read so far.

Shares of PENN were up 15% in the early going today. But it seems to me that Disney will be the bigger beneficiary of this deal.  

For one, Penn’s Barstool Sportsbook app has just a 2% share of the U.S. sports betting market. Seems like the only way to go is up. And the ESPN name should absolutely help. 

But for Disney, ESPN has been a bit of a millstone around its neck. 

Albatross! Get Your Albatross!

I tried to find the exact date and I couldn’t, but it was somewhere around 2010 or 2011 that ESPN signed an exclusive deal to keep ESPN as a cable TV channel. It seemed shortsighted at the time, because the whole cutting the cord and streaming thing was just taking off. Cable TV subscriptions have done nothing but decline and Disney was taking in less and less each year from ESPN. 

10 years ago, there were 100 million American cable subscribers getting ESPN. Today it’s 70 million.

Of course, it was the cable revenue from ESPN that provided the cash for Disney to buy the Star Wars and Marvel franchises and helped launch the Disney+ streaming service.

For the first two quarters of this year, ESPN generated $14 billion in revenue. and $3 billion in profit. But those numbers were down 6% and 29% over last year. Combine that with sharply rising licensing deals with pro sports leagues and it’s kinda easy to see why analysts (myself included) have said that Disney should just sell ESPN, let it be somebody else’s headache. 

This is why CEO Iger has been actively talking with the NBA, NFL and MLB about a partnership with ESPN. Seems like they should all want a stake, because streaming platforms still don’t get anywhere near the viewership that cable and ESPN do – which is why none of them will make a full commitment to Amazon Prime or Twitter or any other online-only platform that’s interested in streaming sports. That’s also probably why Disney signed that cable TV deal 10 years ago. 

Content is King 

Disney’s Parks, Experiences and Products division generates roughly half of Disney’s $87 billion in trailing 12-month revenue. If I were gonna worry about something, it would be Dsiney’s movies. Still the top at the box office, the $3.4 billion so far this year will leave it far behind the $13 billion Disney generated in 2019. 

Ultimately, if I could place a wager on ESPN Bet about the future of ESPN itself, I would bet that some combination of NBA, NFL and MLB (and maybe MLS) end up partnering with the network. It makes too much sense not to…

Disney reports earnings today, after the bell. The stock is trading down at ~$86 as I write. That’s right at its COVID lows from March 2020. You’d have to go back to February 2016 to find another time the stock price was this low, and it didn’t stay there for long. 

I’d love to see the stock get whacked tonight after earnings. I’d be more than happy to grab some shares at 8 or 9 year lows.

That’s it for me today, take care and I’ll talk to you Friday.

Briton Ryle
Chief Investment Strategist
Pro Trader Today
brit.ryle@protradertoday.com
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