Disney is a brand we all know and love. The company has been around for almost 100 years and in that time has built a formidable business in the media sector. It’s a company that until the pandemic was also consistently growing it’s dividend. But the dividend is not the only reason why I bought shares in Disney. In this article I want to outline Disney’s business and inform you why I have bought shares in Disney and will continue to do so over the coming years.
Disney has 4 main revenue streams to their business.
The first is their parks business, which is their Disney branded theme parks and cruises they have in places like Paris, Hong Kong and Florida. Pre covid, this segment contributed the majority of their revenue base and has been quite badly impacted from the lockdowns as a lot of their parks have been shut or on reduced capacity. This segment is forecasted to be hit in the short term but start to recover in 2021.
Their second business line is their studio entertainment business which includes brands such as Lucas films, Pixar and Marvel. This segment generates money through distributing their films and content. It was also quite badly affected from the pandemic as a lot of cinemas have been shut and the whole industry has effectively grinded to a halt. However some of their newest movies such as Mulan were released on their Disney Plus platform but I will go into more detail about this later.
Third is their media networks, so think of their TV channels such as ABC, National Geographic, The Disney Channel and many others. This segment makes money through advertising and licensing content.
Their Fourth is their direct to consumer segment which I believe is their most interesting segment. This includes their relatively new streaming platform “Disney Plus” which aggregates a lot of their legacy content into a platform that can be viewed from home. This segment makes money by charging users a monthly subscription fee.
Based on their latest financials, here is a breakdown of their revenue.
Headwinds and Tailwinds
Disney is unique in that is has had some significant tail winds and headwinds at different times this year. At the start of the year the lockdowns across the world meant it’s parks have been shut and this has impacted it’s revenue from this segment quite badly.
However, this has been mitigated by the growth in Disney plus which has grown subscribers significantly over the past 1 year.
Remember that Disney plus was only announced in November 2019 so to add 73 million subscribers in a year is quite an achievement.
Vaccine Tail Winds
Now that we have multiple vaccines starting to roll out globally, we should start to see the parks open up in 2021 which will mean their revenues from this segment will improve. I think the big win from 2020 is Disney plus and I think their DTC segment will be their shining light through the next few years as it continues to grow.
Streaming Business: Disney Plus
The company during their investor day in December 2020 said Disney+ had 86.8 million subscribers as of Dec. 2. If you also add in the subscribers from their other networks like ESPN+ and Hulu then they have 137 million subscribers worldwide to their content.
Initially when Disney anounnced Disney + in Nov 2019 they issued guidance of how many subscribers they were looking to have by 2024. Initially they said they would likely have between 60 million to 90 million subscribers by this time. We can see the effects Covid-19 have had on these estimates as they have already reached the top end of this estimate in only one year!
Furthermore, what is really exciting is they have upped their future estimates of subscribers to between 230-260 million worldwide by 2024. This represents a huge potential for them to become one of if not the dominant streaming player in the market alongside Netflix. At the time of writing this article Netflix have a subscriber base of around 195 million people. So we can see if Disney can execute on this estimate that they will take a large pie in the streaming sector. They expect this segment to become profitable in 2024 and have started to increase their prices already.
If they can execute they will be able to generate a huge amount of cash from this recurring subscriber base.
Content is King
One of the key reasons I think Disney has a huge advantage over a company like Netflix is they own all of the content they have on their platform.
Netflix started out as a tech company that would aggregate content from lots of different providers (Disney included) and then would pay each of the content owners a fee based on the number of views each piece of content gets.
This means that the unit economics of such an endeavour mean that it is much harder to get to profitability.
So what did Netflix do?
They started to invest aggressively into creating their own content. And so far this has reaped them a lot of rewards in terms of subscribers as they are able to generate lots of amazing content that is relevant and topical (think TigerKing this year).
I think that Netflix realised something really important. This is that the content owners are going to be the ones who win the streaming game.
As you can see from the graph, they have consistently invested more and more money each year in order to generate the content that people want to watch. Once you have the platform then your main differentiator to your competitors is your content you have.
Netflix are not the only streaming provider to invest money into new content. Amazon are also investing around 6 billion dollars this year into their own content.
Why does this matter for Disney?
Well, a huge advantage Disney have is that they already own bucket loads of content. With all the media brands and movies they already own their content is already in massive demand and this doesn’t account for all the content they will create in the future. In their Investor day their CEO announced that they will be investing into generating more content and announced some new series as part of their Star Wars and Marvel franchises.
Disney also piloted on their platform the release of a highly rated movie called Mulan on a pay per view basis. If this type of content becomes more popular they could look to monetise more of their content in this way and cut out the middle man distributors which could help their button line.
What things to look for with Disney?
I think a key consideration with Disney and any other content provider is whether or not they can turn their platform of subsribers into a profitable business. If you need to constantly invest money into more content to keep growing or retain market share then this could be a risk to the model. However, I think the streaming sector will further consolidate in the future and there will be 1-2 winners of this, which is why I think the strategy Disney is employing at the moment makes a lot of sense. If they have the best content then they can raise their prices and the barriers to entry for others are too high to be able to compete.
If however over the next few years I can’t see a clear path to profitability from this segment then my investment thesis might change.
The key to Disney’s success will be it’s subscriber growth over the next 3 years. I will be paying a close eye to earnings reports to see if they are able to deliver on their targets. If this fundamentally changes then this might make me reconsider my position.
Disney is trading at an all time high at a market cap of 322 billion dollars. Based on Market Watch’s analysts recommendations there are 19 buy, 10 holds and 0 sells. The price has run up over the past 2 months, firstly on the news of the vaccine being approved and then after their most recent investor day when they vastly increased their guidance of subscriber growth over the next 4 years.
Whilst there are still some headwinds from their parks business still being impacted by Covid I think investors are looking further afield and are pricing in the growth of Disney Plus which is why the share price is trading above it’s pre-covid levels.
I am not concerned about the price being at an all time high. When I take a look at the comparison with Netflix in terms of subscribers theres still a lot of value to have here.
Comparison with Netflix
When looking at the Disney Market Cap with Netflix, Disney has a market cap of 322 billion vs 227 billion in Netflix. Netflix has 195 million subscribers vs 137 million subscribers Disney has for all of the subscription services it owns.
Netflix doesn’t have any other business lines like Disney does so in terms of market cap, each subscriber is worth $1164 in terms of market cap price. Because DTC only makes up 24% of Disney’s overall revenue, I think it makes sense on a like for like basis to compare the value of each subscriber based on 24% of their market cap. If we do this calculation, each subscriber contributes $564 in market cap to Disney.
What this means is, on a like for like basis that investors in Netflix are paying over double what investors are paying for in Disney for each subscriber.
Disney also have a much stronger brand in terms of content than Netflix so I think investors are not pricing the difference in these two.
If Disney were priced the same as Netflix in terms of their subscribers, they would be priced around 25% higher than the current share price.
My Strategy with Disney
I bought some shares during the crash earlier this year with my average buy price around 120 USD. When cash allows I will be dollar cost averaging more into this stock over the next year and if any significant pullbacks occur I will look to add to my position. However, as I think this stock will continue to grow over the next few years I am not as concerned about the daily price.
This is a stock I am looking at investing in for the long term as I think if they can execute on their strategy in Disney Plus, this will be a lovely cash generating businesses that could form a core part of my portfolio. My hope will be is that they can grow around 20-30% per year over the next 4 years and increase their dividend once they start to make Disney plus profitable.
I think there are a lot of positives when looking at Disney’s stock and it’s a stock you can buy without worrying. Disney is a brand that is never going to go away and I think it will rewards shareholders in the future.
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