Disney: A Good Risk-Reward?
Let's Take a Closer Look
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At $86/share, Disney (DIS) shares are once again hovering around covid lows (~$80 was the bottom). At that time however, parks were closed, no movies were being made, and the streaming business was just getting off the ground. Today’s market environment is drastically different wouldn’t you say?
Let’s take a closer look at Disney.
Disney Is A High Quality Business
Disney is what I consider to be a Stage 3 Maverick: A Leader.
Leaders can be great long-term investments. They exhibit substantially lower risk compared to Disruptors and Contenders, yet can outperform the market for years, even after it is apparent that they’re dominant businesses.
There is no doubt that Disney is an iconic company. Disney has some of the greatest brands in entertainment, along with unforgettable theme parks and experiences. It is a company that occupies a special place in the hearts of millions of people around the world.
Disney Assets
Intellectual Property
“[Disney’s IP is] like an oil well, where all the oil seeps back in”
Warren Buffet
Disney is one of the world’s most recognized brands. It is the King of Characters & Content: Marvel, Pixar, Star Wars… no one else comes close.
This IP drives attendance at Theme Parks.
This IP drives merchandise sales.
This IP drives Movie content.
This IP drives significant mindshare and of course Brand affinity.
Theme Parks
The Parks business is a good business. Disney’s theme parks pretty much have no competition. The closest competitor is Universal, but I’d argue Disney appeals to a different group of customers.
Attendance at theme parks is driven by unique IP, so Disney has wonderful Pricing Power.
Lastly, starting a theme park is neither easy (think permits) nor cheap (high-fixed costs) so they’re well protected from future competition.
ESPN
Pretty much the de facto sports channel. Makes money from affiliate fees and advertising, which has made ESPN a high margin cash cow.
Sports is one of the major reasons why people continue to pay for cable today. ESPN benefits from this.
That said, this is a business in secular decline as people continue to cut the cord and forgo their cable subscriptions.
Disney Plus
Streaming is where the growth is coming from, with the potential to strengthen their consumer relationships and for higher margins down the line.
This includes Hulu which is majority owned by Disney.
Unless Disney seriously mis-executes, looking out 5 years, I certainly believe Disney+ will continue to be one of the winners of the streaming wars.
Disney’s Flywheel
Here's a simplified view of Disney's flywheel:
Create compelling content and characters
Distribute content across multiple channels (movies, TV, streaming etc)
Extend IP into theme parks, merchandise, and experiences
Generate revenue and data from all of these touch points
Reinvest in content creation and acquisitions
Repeat
This cycle allows Disney to:
Maximize the value of its IP across multiple revenue streams
Create deep emotional connections with consumers
Gather data to inform future content and business decisions
Continuously reinforce its brand and market position
The flywheel demonstrates where Disney’s competitive advantage stems from.
Concerns About Disney
Like any company, Disney faces challenges. Here are some of the most important things the market is concerned about.
Film Studios
2023 movies were a let down: Out of eight major theatrical releases from Disney, seven significantly underperformed both in the US and overseas. This created fear in the market and raised questions about whether Disney had lost its movie making magic.
Look, movies are a hits driven business, but when it comes to Disney, they have a history of making blockbusters. One year doesn’t make a trend. Did you know that since 2005, Disney has released 27 billion dollar hits, more than the whole rest of the entertainment industry combined (22)?!
2024 has been completely different:
Inside Out 2, Deadpool and Wolverine, Kingdom and the Planet of the Apes have earned a collective $2.8B globally (and counting).
Inside Out 2 is the highest grossing animated film of all time (>$1.5B).
And the year isn’t over. Disney plans to release “Mufasa: The Lion King” and Moana 2 later this year. Note: The original Moana has crossed one billion hours streamed on Disney+!
Also note that the 2025 and 2026 lineup is not too shabby either:
2025:
Avatar 3
Captain America: Brave New World
Zootopia 2
2026
Toy Story 5 (the first one since 2019!)
Avengers Doomsday
A new Star Wars Movie
So yeah, I’m not worried about the studios.
Theme Parks
The market seems to be concerned that the next few quarters might be weak.
But we’re not interested in the next few quarters. We care what is going to be happening several years out. And the theme parks business is a crown jewel for the company, and an intricate part of Disney’s flywheel.
Disney is in the business of storytelling, and nothing is more important to this company than creativity. And it is at Disneyland (and other park destinations), among fantastical lands and immersive attractions, that their stories and characters come to life.
Financially, the company continues to outperform pre-pandemic levels, with both revenue and operating income in Q3 FY24 exceeding Q3 FY19 by ~30%. So I think the Parks Business will be just fine.
ESPN
Although this is a cash cow for the company, the current business model is at risk. The move away from cable is real.
That said, Disney is combating this with their DTC offerings. By Fall of 2025, Disney plans to make the full suite of ESPN’s channels available as a stand-alone and highly interactive digital destination
Not only will this give consumers the ability to stream their favorite live games and studio programming, it will enable them to take advantage of immersive sports experiences including betting, fantasy sports, e-commerce, and more.
I am particularly excited about the potential of betting, which can turn into a very large high margin source of revenue for the company.
Profitable Streaming
The market is concerned about whether the streaming business will continue losing money.
I think that was to be expected. It’s not cheap or easy to subscribe 100s of millions of customers.
The Streaming Business is simply following the J-Curve. (The “J-curve” is a plot of an investment’s performance versus time where the shape of the plot initially dips to negative values and then recovers to increasingly positive values, thereby producing a pattern resembling the letter “J”.)
The good news is that it just had its very first profitable quarter, and is once again on pace to do so in Q4.
Bob Iger
Bob Iger is a Hall Of Fame CEO. He is widely regarded as one of the most successful CEOs in recent business history, particularly in the entertainment industry.
His track record includes the following:
Financial Performance: He is known for his strategic foresight and ability to anticipate industry trends. As a result, during his initial tenure as CEO (2005-2020), along with revenue and profit growth, Disney's market capitalization grew from around $50 billion to over $230 billion, outperforming the S&P 500.
Strategic Acquisitions: Acquisitions like Pixar (2006), Marvel Entertainment (2009), Lucasfilm (2012), 21st Century Fox (2019) expanded Disney's intellectual property portfolio and content creation capabilities (increasing the company’s competitive advantages).
Technological Adaptation: Launched Disney+ in 2019, which quickly gained over 100 million subscribers, and positioned Disney to compete effectively in the streaming era.
International Expansion: Oversaw the opening of Shanghai Disneyland in 2016 and expanded Disney's global footprint and brand recognition.
It's worth noting that Iger's legacy isn't without criticisms. Some have questioned the high prices paid for acquisitions, and there have been debates about worker compensation at Disney parks. Additionally, his return as CEO in 2022 has presented new challenges in a rapidly changing media landscape.
However, Iger's overall track record of strategic decision-making, financial performance, and positioning Disney for the future has cemented his reputation as an exceptional CEO in the entertainment industry.
In 2020, Bob had retired at the top of his game. But he decided to come back in 2022. Why? Because he saw potential. He didn’t feel his work was done, and must have felt very confident about the future of the company. Now that he is back, he doesn’t want to end his career on a down note, which means he is likely motivated and committed to making Disney successful once again.
As potential shareholders, our incentives seem very much aligned with his.
Back of the Envelope Valuation
Debt: ~$50B
Cash: ~$14B
Market Cap: ~$155B
Enterprise Value: ~$190B
The Parks business should earn about $10B in EBIT. At a current company valuation of $155 Billion, that’s a ~15X multiple. That’s not a demanding valuation.
That implies that buyers are getting the rest of the company for free (aside from the net debt of course).
Here’s what they’re getting:
Streaming Business ($90-$140 billion):
I don’t see why the streaming business won’t get any love especially now that Disney turned a streaming profit.
DIS with 155m subs is the number 3 streaming player behind Netflix & Amazon. And I think they have better pricing power.
If Disney gets
⅓ of the NFLX valuation (Nflx has 277m subs, and a market cap of $284 Billion), that gives the streaming business a ~$95B valuation.
½ of the NFLX valuation, that gives the streaming business a ~$142B valuation.
The Movie Business ($35-$66 billion)
Recall the following acquisitions:
Pixar (2006): $7.4 billion, Marvel Entertainment (2009): $4 billion, Lucasfilm (2012): $4.05 billion. How much are they worth today?
These brands have stood the test of time, so I’d argue these brands/companies are significantly stronger today than at the time of acquisition.
If we assume their value increased by:
Case 1 (Low Appreciation): 3%/yr, then they are now worth: $25 Billion. Adjust 2%/yr for inflation: $35 Billion.
Case 2 (Moderate Appreciation): At a 7% rate of appreciation (the avg long term growth of the S&P500), gives us $48 billion. Adjust 2%/yr for inflation: $66 Billion.
This doesn’t even take into account all their other studio assets:
Walt Disney Pictures
Walt Disney Animation Studios
20th Century Studios (formerly 20th Century Fox)
Searchlight Pictures (formerly Fox Searchlight Pictures)
Disneynature
Optionality with ESPN Sports Betting
There is considerable overlap in the valuation of the streaming business, the movie business, and Disney’s brand value (~$47 billion reportedly). How much overlap? I’m not sure. But back of the envelope, even accounting for the debt load (which I think is manageable), it feels like fair value is closer to double the current stock price than the current stock price.
Does that make Disney a good risk-reward? You must decide.
Questions:
Do you agree with the below?
What am I missing?
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