Shares of Disney jumped at the open on Wednesday following news that it is combating slow subscriber growth with a $1 billion investment to acquire a 33 percent stake in sports-streaming service BamTech.
Disney shares have fallen more than 10 percent in the past year over concerns about Disney's growth, as more customers are cutting the cord on its ESPN cable service. BamTech was created by Major League Baseball.
The media giant intends to launch a new digital service that will be separate from its current cable offering. However, Elevation Partners co-founder Roger McNamee said the transition for Disney could be a difficult one.
"I think this was a really smart move for Disney," McNamee said. "I think the situation Disney faces today is a little bit like the one that Apple faces for the iPhone; that when you have been magnificently successful — more successful than your competitors — it is often hard to come up with a second act that makes for a smooth transition."
I think the transition is likely to be murky, and I think it's going to scare people.Roger McNameeElevation Partners co-founder
McNamee added that under Disney's traditional cable package, 80 million people paid for ESPN whether they wanted it or not. Thus, as more people cut the cord and unbundle, Disney will need to reset its business model.
"I think in reality over time, there will be just as much money in it for them as there is now, but I think the transition is likely to be murky, and I think it's going to scare people," McNamee said.
As a result, the question on many investors' minds is whether Disney's current share price is valuated fairly. According to Morgan Stanley media analyst Ben Swinburne, Disney's stock has had a tremendous run and it will be hard to grow against those big numbers.
"I think that's why the multiple is where it is. Versus the market, it does look compelling, but versus the rest of media, to us, there are better opportunities in terms of being overweight elsewhere in the sector," Swinburne said.
Media analyst Steven Cahall from RBC Capital Markets also agreed, noting a seesaw sentiment over the stock in the past year. Bullish investors love the long-term cash flow of Disney's studio and theme parks, but bearish investors are focused on the media networks and subscriber loss.
"We think that that is probably not far off fair value," Cahall said.
Cahall added that the reason for the stock being fairly valued is that much of the growth for Disney stems from parks and resorts, which is more of a cyclical business. Additionally, it comes from the studios, which is difficult to anticipate in the future as its growth has not been as high as others within its peer group.
"This transition of the earnings composition to something that is less predictable probably should result in some multiple compression," he said.