Yes, the stock had a dip... but not all dips should be bought. I took a deep dive into Disney, since there's been a lot of hype around Disney+ – the streaming service – because of its rapid growth and potential to compete with Netflix.
We're all familiar with Disney – one of the most powerful brands in the world. It was started by Walt Disney, when he moved to California in in the summer of 1923. He started with just the cartoon series of Alice's Wonderland, and then a few other cartoon series. The biggest hit, for Disney, took place in 1928 with Mickey Mouse. Along with cartoon sales, Disney realized revenues from licensing merchandise, etc. New hit films – like Snow White, Pinocchio, Dumbo, Bambi, Cinderella, etc. – were released over the next two decades. Disneyland, theme park, was open in July of 1955. As the company grew more and more successful, they decided to open the much larger resort-style theme park in Orlando in 1971 – the year Walt Disney passed.
The company is going to be 100 years old... there is, of course, a ton of history. The brand is so powerful, and its safe to say it's not going anywhere. But, there's been challenges in leadership – especially recently.
Right now, after Bob Iger stepped down from his role as CEO, just before the pandemic, he left the reigns to a very unpopular Bob Chapek. I'm not quite sure why people don't like this guy... but they really want him out (lol).
Acquisitions & Disney+
Much of Disney recent growth has been fueled by acquisitions. They own the rights to a ton of IP, which gives them a lot of potential for licensing or content production. Naturally, this is why most investors seem to be excited about Disney+ the streaming service which grew subscribers to 179 million in just over 2 years (compared to Netlix's 214 million, which took much longer).
But, most of this took place during the pandemic. It's not fair to assume that we'll continue to see growth rates like that, nor is it fair to assume that both business models are the same.
Disney+ isn't expected to be profitable until 2024, whereas Neflix is a much more mature and established company at this point. Streaming is still a growing industry, but I think the real threat, at this point is YouTube.
The other thing that doesn't seem to be factored in is Disney+ has such low revenue per subscriber, which seems to be decreasing. Netflix, on the other hand, is in the position to increase subscription rates.
I honestly don't see how Disney+ is a big threat to Netlix, and a theme park business (regardless of the brand) isn't enough to make me an investor... but let's take a look at valuation.
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If we forecast a 10% CAGR of (total) subscribers, including Disney+, into 2024 – which gets near 240 million subscribers, and assume some sort of expansion in ARPU and margins (i.e. 20% operating margins in their Media business), and the Parks revenue and margins return to pre-pandemic levels, we get about $100bn in revenues by 2024. At a 17% net income margin, that's about $9.50 EPS.
Factoring all that into a DCF calculation, I would say Disney is at best fair valued. They do have a significant cash flow advantage to Netflix. But, I wouldn't go as far as saying the stock is undervalued, even after this dip.
The valuation multiples are still high. There has to be some compression to the P/E of 140x right now. Giving a weighting to each of these valuation inputs, I'd say the stock can go to $210 – close to where's it been. A 30% upside.... which doesn't quite excite me, tbh. But, I'd consider it if we dip some more. I just don't see the reason to be so bullish on Disney+ and a re-opening play... maybe it's just not for me.
Let me know what you think!
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