Explaining How Star Wars and Avengers Impact Disney’s Stock Performance

Explaining How Star Wars and Avengers Impact Disney’s Stock Performance

The Force Awakens and Age of Ultron are expected to easily break the one billion barrier

With Avengers: Age of Ultron coming out last week and the high expectations for the sequel to the original trilogy – Star Wars: The Force Awakens, traders are wondering how their success, or lack of it, will impact the stock price of one of the entertainment giants – Walt Disney Co.

Avengers is looking to make between $1-1.5 bln in revenue, the the bar is set higher for the Force Awakens, despite some negative feelings created by the last three installments in the franchise. Some even expect the movie to surpass the current record holder Avatar, that has grossed approximately $2.7 bln.

The sums themselves aren’t actually that big when you compare them with the overall company performance. 75% of Disney’s revenue comes from its media division, where the ESPN network and ABC are the main cash cows. But the remaining 25% are what drive emotion trading.

Not only Star Wars (purchased with the acquisition of Lucasfilm for $4 bln in 2012), but the Marvel Universe and other hits like Frozen and Pixar’s Big Hero Six, bring in some serious cash. Even more importantly, they provide revenue streams for many more years to come (for more on the method of creating films at a set price and managing the duds among them you can read here). These come from three main sources:

Amusement parks and rides – the potential for creating something that attracts families to visit theme parks and immerse themselves in the atmosphere of a movie, interact with its heroes is what makes the difference between spending hundreds to thousands on a family trip and tickets.

Merchandise – Toys are a high margin business, but the challenge there is to find a scalable line that has enough appeal to warrant mass production. George Lucas’ famous deal to keep ownership of Star Wars toys before the first movie came out, is one of the main sources of his personal wealth

Cross media products – With more channels popping up where spinoffs and “by-products” can be promoted, this revenue stream has increased its importance. 3D animated cartoons over Cartoon Network and now NETFLIX, as well as TV series like The Flash, Green Arrow and Daredevil are turning into steadier and more predictable products. They can even boost the previous two sources.

While expectations for this part of the business are, let’s say optimistic, things aren’t so rosy for the rest. The media business is facing some new threats from the development of cable tv distribution and how it’s sold to customers, mainly in the US. With TV packages sold in bundles the consumers pay a certain amount in order to get the most desired content, but they get the feeling of overspending for channels that don’t necessarily watch.

For operators this is a good deal, as there are still clients that expand their viewership and get exposed to more advertising. But in an age of on-demand viewing the math isn’t adding up.

Verizon, another company available in Trading 212, recently announced an “unbundling” of how they will be selling viewing packages, responding to consumer pressure. Disney are currently suing them to stall this development, as they pitch their whole media package to advertisers and create content that can be used (and recycled) across multiple platforms, but it seems like the tide has turned.

The main impact of movies, and especially such a large universe like Star Wars, is that it promises to attract the money of an extremely large audience who will be making purchases based on emotion. Buying based on emotion is what sells for larger margins and looks good on a balance sheet. It has its risks though – the first hint of disappointment among fans of either movie might limit the force’s impact on trader’s sentiment. But come December 18th, we sense a strong presence of moviegoers.

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