(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of NFLX and DIS.)

Shares of the Walt Disney Co. (DIS) have had an unimpressive year, with the stock down by nearly 5 percent so far in 2017, underperforming the S&P 500 by over 17 percentage points. The poor performance has been a result of Wall Street consistently downgrading Disney's revenue and earnings outlooks. However, investors appear to be missing the large opportunity in Disney's future streaming service.

With the stock falling faster than Wall Street estimates, it is trading at a discount to the company's historical earnings multiple. This suggests that Disney shares could present an opportunity for investors with patience and vision.

DIS Chart

DIS data by YCharts

Long-Term View

Disney shares should be viewed more over the long term until investors can gain more confidence in its long-term ability to derive revenue from its streaming content. But with the stock trading at a historical discount, it could present an attractive opportunity for those that are looking in longer-term direction.

In an article on Benzinga, Wells Fargo noted that a Disney streaming service could cost consumers $9.99 per month, making it worth nearly $30 per share. It also seems likely Disney will not incur the content acquisition costs that Netflix did because Disney already has a massive content library. 

Streaming Opportunities Are Large

Disney could add just over $10 million in revenue per 1 million customers at a rate of $9.99 per month. Additionally, according to reports in Forbes, Netflix Inc. (NFLX) paid Disney $300 million to stream Disney content.

Disney would need 30 million subscribers to make up the lost revenue from the Netflix deal, which represents only 60 percent of Netflix's 52 million domestic subscribers, and approximately 30 percent of Netflix's 104 million total global subscribers, based on Netflix's recent 10-Q. (See also: Disney Will Need 32M Subscribers to Beat Netflix.)

According to Disney's 2016 10-K, the Disney channel in the U.S. has 93 million cable subscribers, while the International Disney Channel has 205 million subscribers. The domestic ESPN cable channel has about 90 million subscribers, while the international version has 141 million subscribers. It seems Disney is already in a position to build a huge streaming media base.

Even though not all of its subscribers consume the content on the Disney- and ESPN-owned cable channels, the company has a broad base already in place and would likely need just a fraction of its cable base to convert to have a meaningful impact on revenue. 

Historical Cheap Valuation

With the stock trading at just over 14 times two-year forward EPS estimates, Disney is trading at a historical discount. Since October 1, 2012, Disney has traded at an average two-year forward EPS of 14.8, with a standard deviation of 1.56, giving earnings multiple a range of 13.25 and 16.4. This indicates the stock is trading on the cheaper side of the company's historical average.

Disney's declining stock price is likely because earnings estimates have been slashed by nearly 6.2 percent, to $6.90 since July 19, while the stock has fallen by over 7 percent. However, revenue estimates have been cut by 1.75 percent, to $61.31 billion, during the same time, suggesting Wall Street see trouble for Disney on the cost-control side moreso than on the revenue side. 

DIS Chart

DIS data by YCharts

Disney has a tremendous opportunity for streaming content and a huge base of consumers already using its products that are targeted to convert over to a streaming service. Wall Street has slashed its earnings estimates, which have caused the stock price to fall, giving investors an opportunity to get into Disney stock at a historical discount. 

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdingsInformation presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.

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