Disney has changed a lot recently.
Back at the beginning of 2019, I put together a video detailing the company’s storied
history.
Its ups and downs have been interesting to study.
Many of those shifts in the past have centered around changes in management and consequently
their focus.
How do you feel about the direction they’re headed now?
… Let’s dive in!
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So how is Disney doing?
Well let’s take a quick look at the 3 major parts of their business: their parks, streaming,
and movies.
Now, their theme parks are coming back online, and from an investment perspective, they’ve
been going up against post-pandemic comps - you know, where there was a period of time
with no attendance…
at all.
So it’s more helpful to compare against the fiscal year 2019 - the last full, unaffected
year before any lockdowns.
Now today, they’re still not back to fully operational: their cruise ships have still
been operating at reduced capacity, the number of international travelers in attendance is
still relatively low (they used to account for almost 20% of guests), and their parks
in Shanghai and Hong Kong have been either closed or operating at reduced capacity.
In 2019, Disney’s Parks, Experiences and Products segment generated $26B in revenue
and $6.7B in operating income.
So far (for the first six months of their 2022 fiscal year), they’ve reported just
under $14B in revenues and just over $4B in operating profit.
So from that perspective, they’re on track to have a stellar year, even if the Asian
lockdowns were not easing - which they are… which will favorably impact all the headwinds
I just mentioned.
Now, even back in 2019 when I first created a few videos about Disney, there were concerns
of recession.
I believe those concerns are quite obviously even stronger today.
But Disney’s parks have surprisingly proved resilient in the past.
Here’s how I broke it down in that video…
“Since Disneyland opened in the 1950’s they’ve been able to realize a pretty steady
rise in park attendance and increases to their ticket prices.
And although critics will point to an imminent economic downturn, as a reason to discount
this aspect of their business, the parks have been pretty resilient to that in the past.
For example, the trough year of our most recent recession, 2009, was a record breaking year
for park attendance even as the company was able to increase ticket prices according to
its regular schedule.”
On the Disney+ front, they’ve continued to build their base, despite concerns after
Netflix’s surprise subscriber drop.
In their most recent earnings call, Disney’s CEO said:
“We ended Q2 with more than 205 million total subscriptions after adding 9.2 million
in the quarter.
That includes 7.9 million Disney+ subscribers, keeping us on track to reach 230 million to
260 million Disney+ subscribers by fiscal '24.”
Now, I’ve always supported the idea of Disney moving into streaming.
But they are spending a lot to try to “win the streaming war.”
In their call, they said they expect to spend around $32B this year on content.
And one thing I used to love about Disney, versus Netflix specifically, is that they
were able to fund their content creation from the money they were making each year.
But now, for perspective, that line item expense ALONE is more than they’ve ever made in
even gross profits in any given year.
But I don’t think they necessarily have to do that (er… had to do that).
Their IP (their intellectual property) is unmatched.
There will be people who will pay for that service - for access to those characters - no
matter what.
They could afford to play a more stable (...sustainable) game.
But instead, this aggressive focus on streaming has afforded them almost a high-tech growth
stock sort of valuation by investors.
We’ve really seen that since they really started their streaming soiree back in 2019.
Before that, Disney’s valuations were much more stable - much more predictable from an
investor’s perspective.
To that end, they also used to pay a regularly increasing dividend.
That will probably come back at some point.
But investors have now been able to see what’s more important to management (at least for
now) - for better or for worse.
Now, investors were happy to see subscriber growth and a continued strong upward trend.
Disney’s ARPU (or average revenue per user) was north of $4.
But when you dig into the numbers, that sub growth was really driven by their Indian division
called Disney+ Hotstar.
The problem with that is that the ARPU for those subs specifically is closer to 75 cents
- it’s actually pulling down their overarching ARPU.
So the bulk of their growth is coming from their least profitable group.
Couple that with the fact that Disney’s Direct-to-Consumer segment lost almost $900MM
- that’s three times the loss reported the year prior.
Now, on this front, they do have a lot going for them; I don’t want to discount that.
They’re planning to be available in 50 more countries this fiscal year alone.
They’re rolling out an ad-supported tier, which seems to be the trend for these services.
Like I said, I think long term they’ll be fine here, but as a prospective investor,
I just would have rather seen them play a more measured and sustainable game.
And finally, with their movies…
Obviously, pre-pandemic, they were on top things in this department - just dominating
the box office year after year.
In general, it’s going to take a while for the industry as a whole to get back to where
it was, but Disney seems to be jumping right back into the game.
They’ve had a couple of box office hits since that time and have a pretty solid line
up through the rest of this year: Lightyear, another Thor movie, Pinocchio, another Black
Panther, another Guardians of the Galaxy, and another Avatar (remember that?!).
Now, when Disney has success in the box office, that boosts all their other verticals - it’s
a really great business model.
All that being said, I think one of their biggest headwinds right now is wrapped up
in their political controversies.
Honestly, I think that’s going to continue to negatively affect them as a business over
the near term (and I’m not just talking about them losing their special tax district…).
Don’t get me wrong, I think they’ll remain a viable company long term - their IP is just
too ridiculously strong.
(As long as they don’t let their debt get too out of hand trying to rush that streaming
vision.)
But I am VERY curious, as an investor (...and otherwise, but that’s not important here),
to see how the public “votes” on Disney’s political stances through their upcoming release
of the (controversial) Lightyear.
We’ll see…
In short, I think there’s a lot of uncertainty ahead.
As long as we don’t reimplement lockdowns, I expect their parks to continue to thrive
(as much of a racket as they are…).
And as long as the company doesn't get TOO political, I suspect they’ll continue to
dominate the box office as well - again, that IP is just going to be too hard for some people
to stay away from, no matter how they feel.
So with that light - with that context - about what’s going on in Disney’s world, let’s
check out the numbers.
If you look at their revenue, EBITDA, net income, earnings per-share, and free cash
flow, you can see a pretty consistent, stable, steady growth story from 2012 through 2018.
And then in 2019, that’s when they acquired Fox, took on a lot of debt, and really started
their venture into streaming.
And then of course in 2020 they were faced with the pandemic which meant worldwide lockdowns
…which meant closed parks and closed movie theaters.
Despite that, and perhaps (almost solely) because of their new streaming exposure, Disney’s
stock price soared after its initial downturn during the market-wide Covid crash.
That kind of price action messes with multiples - a common issue when trying to value growth
stocks.
That’s why when I looked at historical averages I wanted to break out the pre-2019 numbers
to get an idea of how Disney used to be valued.
Then, you can take that and add whatever sort of “growth stock premium” you think makes
sense given their newer streaming exposure.
I also pulled in their enterprise value (the EV) here since that also accounts for their
now elevated debt levels relative to the past.
You can see the spikes here in 2019 and 2021.
You might notice it’s come down of late - that’s mostly because their stock’s
been crashing, not because they’ve reduced that much debt - but it’s something I want
to keep an eye on as they aggressively pursue their expensive streaming war.
So that’s why one of the multiples we’re considering here is their EV over EBITDA - it’s
just going to be a better representation of the full picture in Disney’s case.
Now, when you look at these numbers, it’s understandable that their earnings multiple
would be out of whack at this point as they return to normal.
That’s why I looked out into estimates for the coming years.
But with that in mind, you should note that over the last 90 days more than 85% of the
revisions that have been made by analysts (20 of 23) have been downward.
So obviously analysts are missing something here when it comes to understanding Disney’s
near term prospects - I wouldn’t be surprised by more downward revisions putting even more
pressure on the stock’s price.
But even if you don’t think these estimates for future earnings will come down, these
multiples still seem high in their own right.
And you can see here just how overvalued this stock is no matter which of these ways you
choose to look at it.
Each of these is just looking at how the current multiple compares relative to the stock’s
historical averages.
Take the price-to-free cash flow, for example, and look at how it compares to the long-term
average.
So in this instance, its current multiple is 18% higher than that average.
In other words, from that perspective, there is an implied downside of an additional 18%
- and that’s the most favorable light here…
Given the volatility I expect they’ll face from all the “uncertainty” factors that
I mentioned earlier, I’d rather wait until they either grow into their current valuation
or until prices come down some more.
And I definitely wouldn’t want to pick it up with the technicals where they are today.
So we’ll keep an eye on it.
But what do you think?
Let me know in the comments.
And if you appreciated this analysis, you’ll love these deep dives I did, where I go even
deeper into the fundamentals and various valuation methodologies.
Check ‘em out!
You won’t regret it.
I wish all the best.
Take care.