Media stocks took a pounding last week as it is becoming more evident that traditional powers like Disney (DIS), Comcast (CMCSA) and Time Warner (TWX) need to accelerate their OTT (over the top) offerings to better compete with streaming giant Netflix (NFLX).
Disney shares, which last week lost about 5% of its value, was one of the hardest media companies hit. The shares, which closed Friday at $97.07, have lost about 7% year to date, compared with a 10% rise for the S&P 500 Index.
The decline in DIS stock suggest that investors weren’t impressed by CEO Bob Iger’s explanation during the Bank of America Merrill Lynch conference that the company plans to move its Marvel and Star Wars units exclusively onto its own Disney-branded OTT service rather than remaining on Netflix — an idea that has been tossed around for a number of years.
But Iger’s insistence that Disney’s recent M&A activity will continue, particularly from the standpoint of enhancing its digital presence, sent shares of Snap (SNAP) soaring as much as 7.4% Thursday. Investors assumed Disney would seek to takeout the embattled social media company in an effort to better compete with the likes of Facebook (FB) and Alphabet’s (GOOG, GOOGL).
The rise in SNAP stock continued on Friday as the shares adding as much as 4.3% and ending the abbreviated trading week up 7.5%, while both the Dow and S&P lost more than half of a percent. Some analysts believe SNAP stock can reach $20 per share, which suggest 30% premium from current levels.
But would a deal for SNAP make sense for Disney? SNAP has missed Wall Street’s earnings target in two straight quarters and is not expected to be profitable until 2020. That aside, Disney has its won set of challenges that SNAP can help fix. Notably, the company has seen a persistent decline in its core TV network businesses and wants a presence in the digital advertising market.
To that end, SNAP’s growing Millennial user base can be a major asset to the extent Disney can tap into those users sell its OTT streaming services and other products. So, without question, a deal for SNAP would be seen as a game-changer and one that would allow Disney to own a digital solution as opposed to risk failing by attempting to build one.
What’s more, instead of using its strong cash flow to buy back stock, Disney may want to take out SNAP now as it still trades some 10% below its March IPO price of $17 per share. To the extent Disney can make the deal accretive it would be a windfall for the Burbank, Calif-based company.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.