UBS: Disney has one big advantage that'll make its streaming movie service succeed

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UBS: Disney has one big advantage that'll make its streaming movie service succeed

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In its second-quarter earnings report, Disney announced it would be spending "significantly" to start its own ESPN and movie streaming services.

Disney shares fell after the news, in part because investors were concerned about startup costs, but Doug Mitchelson, an analyst at UBS, has a different view.

"We believe investors are likely underestimating the opportunity for the DisneyPixar over the top service based on our review of the quantity of high quality content that will be available on the service, how well its historical titles have performed in the marketplace when re-released or released as a live action update and due to much of its best content having been held back from being available on any network, whether traditional or streaming video on demand," Mitchelson said.

Mitchelson points out that 18 of the top 100 highest-grossing films of all time are from Disney, and would likely be included in the new service. The service is expected to launch sometime in 2019, and these films may be Disney's biggest advantage over other services.

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Netflix, which currently owns the rights to Disney's movies, has said the movies are important to its service. Netflix's chief content officer had previously said that children and families regularly re-watch Disney movies, which is unique to its content. Shares of Netflix fell after Disney announced it would be pulling its movies from the service.

Moving its movie content from Netflix to a proprietary service won't be free for Disney, but investors' worries about the cost might be overblown, Mitchelson believes.

"Based on our analysis of the potential lost third-party licensing revenue and increased operating costs, we believe our forecasts and Street consensus already fully encompass these launch impacts while not yet including any offset from subscribers to these over the top services," Mitchelson said in a note to clients.

Basically, Mitchelson said the cost of ramping up the new services, about $570 million over the next two years he estimates, is already priced into the stock. Disney is planning to acquire a majority stake in the streaming company Bamtech to help launch the services. Bamtech has helped launch streaming services for entities like the National Hockey League and Major League Baseball.

Disney's strategy differs from other movie studios in that it is especially good at building franchises out of its movies, with lots of merchandise and even theme park attractions in some cases. This franchise building will draw a significant number of users to Disney's new platform which will have a measurable impact on the stock, Mitchelson predicts.

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UBS rates Disney a buy, in part because it expects a strong showing from its streaming services. The bank has a price target of $126 for the company.

Shares of Disney have fallen 3.44% this year.

Click here to watch Disney's stock price move in real time...