Stock Pick of the Week: Disney ($DIS)
A look at one of our favorite media and entertainment companies
Apologies on the brief hiatus….but we’re back! We hope that you have enjoyed our stock picks so far. A few of our picks like Nordstrom (see Oct 18th post) and Pinterest (see August 22th post) have both more than 2x’ed since our coverage. However, not all of our picks have been successful (e.g. Equifax June 21th post). We remind you to use our research as a starting point, and always do your own research for important financial decisions! With that said, let’s take a look at a potential stock to own for recovery in 2021. If you have any ideas, we’d love to hear them in the comments!
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Summary
It’s been a tumultuous year on Wall Street since February amid the coronavirus crash, and one stock in particular that was hit was Disney. COVID-19 forced Disney to navigate tough shut downs and re-openings of its theme parks and cruise lines, but now as the company is shifting into a “new normal” post-COVID mode, its stock is now back up more than 60% from its lows in March.
One bright spot for the company is Disney+, its own on-demand subscription video streaming service, which launched in November 2019. Shows like Hamilton, the live-action movie Mulan, and more are driving huge numbers of downloads, subscribers, and hence revenue for the app, allowing Disney to further accelerate its streaming and DTC strategy amidst the uncertainty around its theme parks.
Did you know?
While Disney has a large presence in sports through ESPN, it has shied away from online gambling. CEO Bob Iger said in February that “I don’t see The Walt Disney Company, certainly in the near term, getting involved in the business of gambling, in effect, by facilitating gambling in any way.” However, Disney actually owns 18.2% million shares of DraftKings, or ~6% of the company through the 21th Fox acquisition. DraftKings has evolved from a daily fantasy sports betting into a more comprehensive online gambling platform. We covered DraftKings earlier and highlighted its attractive growth opportunities in data science, state-by-state legalization, and eSports (see July 12th post). The market consensus doesn’t think Disney will enter the gambling market, despite the ESPN overlap, given its historical aversion to the sector.
Fundamentals (Q3 2020)
Revenue: $11.8B, down 42% compared to last year
Enterprise Value (EV): $325B
EV/EBITDA: 30x
How they make money
Disney has four operating segments: 1) Media Networks, 2) Parks, Experiences and Products, 3) Studio Entertainment and 4) Direct-to-Consumer & International.
Media Networks (56% of Q3 revenue): This segment operates their cable and broadcasting networks and primarily drives revenue from affiliation fees, advertising and licensing fees. For example, a multi-channel video programming distributor (MVPD) like Comcast would carry one of Disney networks and pay an affiliation fee per subscriber. Meanwhile Disney sells advertising between its programming.
Parks, Experiences and Products (8% of Q3 revenue): COVID-19 negatively affected the results in this segment when most of the leisure sector was closed. This includes revenue from theme parks, hotels, and cruise lines.
Studio Entertainment (15% of Q3 revenue): COVID-19 also forced movie theaters to close and delayed the filming of new movies. As a result, new movies are likely pushed out to Q1 or Q2 of next year, however there may be opportunity to stream movies directly to consumers through Disney+.
Direct-to-Consumer & International (34% of Q3 revenue): Similar to Media Network but instead of through MVPD distributors programming and content is offered to consumers directly over the internet. Disney+ is the flagship product that includes 11,700 episodes and 700 movies. Currently there are 57.5M subscribers paying an average $4.62 per month.
Growth opportunities
DTC (Disney+, ESPN+): DTC subscribers has grown rapidly since launching Disney+ in November 2019. It now reaches 57.5M subscribers, which has significant room to expand the user base in the U.S. and internationally. For comparison, the Disney channel in the U.S. alone has 85M subscribers. Furthermore, Netflix has now 195M subscribers worldwide. Disney can likely reach a similar scale, but in a shorter time frame given the market acceptance of DTC streaming options.
DTC Pricing: Average subscriber currently pays $4.62 per month, far below Netflix which has $7-12 average monthly revenue (depending on the region).We think Disney can further drive upside to pricing by introducing premium tiers and exclusive content access (e.g. pay-per-view). 200M subscribers paying $10 per month would represent a $24B annual revenue opportunity.
Deeper Customer Relationship: As Matthew Ball covered in his popular Disney piece, it has always been Walt Disney’s vision to be as close as possible to the consumers, and sell on the entire Disney ecosystem as opposed to a specific piece of content. DTC will allow Disney to further segment customers (e.g. based on your favorite Disney princess) to provide unique and personalized products and services. We think that Disney will likely extract a much greater lifetime value from each subscriber in the upcoming years.
Recovery of Leisure Travel/Entertainment: With line-of-sight to a vaccine rollout, we think next year will be a strong recovery year in leisure, and Disney is mostly likely to benefit from pent-up demand and large consumer savings this year.
Competitors / Risks
Parks, Experiences, Product: It’s clear that this segment has taken the hardest financial blow in the fourth quarter (a $1.1B operating loss alone from theme park and cruise line closures!) and is the major threat to buying Disney stock. However, promising news on the vaccine effectiveness is providing more clarity to the future of its theme parks and cruise lines, as well as opening of retail stores and theatrical releases.
Netflix and other streaming services - On the streaming side, Disney competes with platforms like Netflix and Amazon Prime Video. Disney has the advantage of owning a lot of its own IP and content already so that it isn’t starting from scratch, as well as owning major ownership in popular services like Hulu and ESPN.
Key Questions to Ask Yourself (before we think you should buy...)
Do you think Disney’s losses from its Parks and Experiences segment will have a long-term negative impact on Disney or will Disney be able to recover?
Will Disney be able to provide quality content to its subscribers and double down effectively on Disney+?
Our Take
We think Disney’s focus on its DTC strategy is smart. We think the company is well-positioned for recovery in the long-term and is a good buy at the current price.
Note this is not investment advice. Please consider doing your own research before making any investments!
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