Disney's (NYSE:DIS) shares peaked in mid-July last year. Since that point, they are down roughly 22%. Over the same span, the SPDR S&P 500 Index ETF (NYSEARCA:SPY) has gone up 1.5%. Why the vast underperformance? And how does Twitter (NYSE:TWTR) play into it?
A changing landscape
Disney owns an impressive collection of brands. Intellectual properties that simply can't be replaced, which is one of the reasons why I own the company. However, there's a risk in Disney because so much of its top and bottom lines come from established distribution channels. For example, the company's cable and broadcast businesses, together making up the media networks business, accounted for roughly 42% of the company's revenues through the first nine months of its current fiscal year. This group made up nearly 50% of the company's operating profits.
A big piece of that is ESPN, which makes most of its money through fees charged to cable customers. With the advent of streaming, however, that model is looking increasingly challenged, which is why, when ESPN started to report subscriber losses last year, the shares of Disney began to head lower. Add to this the confusion surrounding the planned retirement of CEO Robert Iger, and there's a lot of uncertainty in the air. Investors don't like uncertainty.
Which makes some of the recent moves at Disney all the more interesting. For example, the company invested in BAMTech, which is known for streaming live sports events like baseball, but really affords Disney the chance to gain the technology behind that ability. Disney has the right to, essentially, buy the company in the future.
Disney has also been investing in Vice Media, a media company aimed at a younger demographic that makes heavy use of the internet. And don't forget its part owner in online streaming service Hulu, one of the three major competitors in the space.
These investments speak to a company that clearly realizes it has to change with the times. That, however, doesn't mean it should simply give up on its old, and still highly profitable, businesses like selling ESPN through cable companies. But, perhaps more interesting in all this, is that there has been a lot of activity leading up to the departure of Iger.
It look increasingly like the company is trying to come up with a long range plan before the CEO goes. And that it is putting key pieces of that plan in place right now. This way, the next CEO simply has to follow the playbook laid out before him or her... At least until the new CEO feels comfortable making changes on his or her own.
And then comes Twitter
Which is where Twitter comes into play. This one-time internet darling remains a key distribution medium and a way in which people around the world communicate, but it looks like it is having a hard time figuring out a long-term business model. So, it's basically looking to sell itself. Disney isn't the only reported bidder.
To be fair, Twitter is no great catch. The company doesn't make any money, its business hasn't been growing, it has policing issues on its network (think rooting out terrorists), and it's trying to expand into new areas, like live streaming. And, on top of that, the price tag could be pretty big, since it has a market cap of roughly $20 billion. Whoever wins Twitter's hand in marriage has their work cut out for them.
There's some interesting things hidden under the covers here, though. For example, Twitter's CEO Jack Dorsey is on Disney's board of directors. If Twitter is looking for a mixture of the best money and the best fit in an acquisition, Disney could have a leg up because of Dorsey's deep knowledge of Disney.
Then there's the not so subtle issue that Disney could be buying a company and the CEO it needs to replace Iger. That's not clear cut since Dorsey also holds the CEO position at another company, splitting his time between Twitter and Square (NYSE:SQ).
However, Disney would solve its leadership problem and gain new technology at the same time if Dorsey were brought on via a Twitter purchase. Dorsey is generally well respected, though I question his decision to try to run two companies at one time.
The big picture
The technology piece of the puzzle is really the big issue, though. That's because Twitter does something that's pretty interesting and it gets a lot of use, even if competitors are encroaching on its turf. From one side, Disney would get access to Twitter's users, valuable in and of itself. From another, it would get access to a new distribution platform... at least new to Disney.
What it would do with that platform is a concerning question, though, since compared to Disney, Twitter is something more akin to the Wild West. There's also the information content of Twitter's "tweets" that could have material value, too, if Disney can figure out how to make sense of all the noise in a way that would make Disney more money.
In the end, Disney, with a $140 billion market cap, can afford to buy Twitter. And it would get some interesting technology in the process, which would allow it to further its goal of shifting to new distribution channels. Importantly, a deal now would allow Iger to set up a game plan for the next CEO to follow, easing the transition.
But is it worth the price? That's harder to figure out. ABC and ESPN could probably benefit from Disney owning Twitter pretty quickly. And if Twitter keeps moving toward streaming, it could give Disney another avenue to experiment with as customer viewing preferences shift. The risk is in paying too much for such "maybe" opportunities.
Moreover, with BAMTech and Hulu already in the fold, it's questionable if Disney really needs Twitter to shift its business in a new direction. The avenue for that already appears well established.
For my two cents, I think Twitter would be an interesting experiment for Disney. But I don't think it's worth the price tag. Disney has too many other good things going on right now, it doesn't need the distraction of an unprofitable and stagnant Twitter.
Disclosure: I am/we are long DIS.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.