Disney (DIS): World's Largest Media Company Becoming Even Stronger (2024)

The Walt Disney Company (NYSE:DIS) has one of the most incredibly rich history, which led up to its position as the world’s largest media and entertainment company. The company is one the most well-perceived and distinct brands globally with a multigenerational audience. With the vast portfolio of classic Disney content enhanced with additional content from the studios of Lucasfilm, Marvel, Pixar, etc., as well as the acquisition of Fox which further builds on its IP strength, the company’s exposure is wide across various markets in media, streaming, theme parks and resorts and more. Disney maintains significant streams of revenue from four segments it operates in with the Media Networks segment accounting for the largest portion at 40% of total revenues in 2020.

Source: Disney

Source: Disney

Among these segments, the streaming business under the Direct-to-Consumer & International segment is the key growth engine with the launch of Disney+. Its total streaming business including Hulu, ESPN+ and Disney Hotstar had experienced incredible streaming growth of 149% in 2020 at 164.3 mln subscribers and its momentum could be maintained through the expansion in international markets especially Asia and a growing library of exclusive content leveraging its vast IP. In the longer term, the gradual recovery of the hospitality and leisure industry could be a tailwind for Disney with its theme parks and resorts reopening but with strict capacity limits.

The Best Brand in Media

Disney features a vast portfolio of distinct content which is one of the reasons for its strong global branding. Since starting in the 1920s, Disney has leveraged its content produced to attain streams of revenue from multiple avenues. This started with the Oswald, Symphony and Mickey Mouse characters that were made into films and animations for both cable TVs and theatres. This enabled Disney to rapidly expand its brand across all media channels.

With its wealth of characters created, Disney utilized them further by forming its first amusem*nt park, Disneyland California in 1955. This cycle of creating content and leveraging them to further expand in other areas of media has made Disney not only the largest Media company in the world but also one of the most recognizable and successful media companies in the world, with a market capitalization of over $300 bln.

With a strong brand built over decades, Disney has made sure that it acquired key media companies to further cement its market share leadership in the Media & Entertainment industry. Over the years, Disney had acquired Lucasfilm, Marvel, Pixar and more to expand its content portfolio. Each of these brands created superior movies such as Star Wars, Spiderman, Thor, Toy Story, Cars and more.

One distinct strength of Disney is that it manages to target its audience with gender marketing. While its competitors focused on animal characters that were made to appeal to everyone, Disney managed to establish clear segments to suit the stereotypes or different genders by creating a series of princesses and superheroes to suit different preferences.

The acquisition of Fox further widens Disney’s ecosystem of content with popular titles such as Deadpool, Avatar, X-Men, Fantastic Four, This Is Us, Modern Family, The Simpsons, etc. Disney saw its profit soar in the first three months of merging with 21^st Century Fox in 2019. The entertainment behemoth says that its net income had increased 85% to $5.4 bln in that quarter, where Hulu, a video streaming platform that resulted from the acquisition had contributed greatly.

Source: TitleMax

After the acquisition of 21^st Century Fox, Disney now dominates 28% of the market. But its market leadership extends beyond TV networks into movie theatres, theme parks and video streaming.

Moreover, Disney owns a very unique and distinct brand with a plethora of creative production studios at its helm such as Marvel, Pixar, Lucasfilm and many more. Disney brands itself as magical, story-telling entertainment for people of all ages. With its audience focusing on kids and their families, Disney had never released R-rated films under the Disney brand. Hence, due to its exclusive family-friendly content, parents may be more willing to let their kids watch Disney movies and shows. This is evidenced by dominating the kids viewership market with a 33% market share. The factor underpinning Disney’s targeting kids and youth is because they are also a key target audience in movie theatres as shown in the graph below.

Source: ScreenAustralia

Source: Disney, CNBC, Visual Capitalist, SeekingAlpha

All in all, Disney had managed to consistently maintain its family-friendly image which gives them the best position in the kids media market underpinned by having the largest market share of 33% in the kids viewership market. It has been one of the strongest media brand names, the key to the company maintaining its market share leadership across all verticals of media & entertainment. We believe that Disney would be able to secure its throne in the future as they had already acquired some of the strongest brands in the industry and would continue to do so.

Vast Content Portfolio

Disney manages to monetize its content by extracting the content’s value across a wide array of businesses. As of October 2020, the Walt Disney Company owned 2,225 active patent families that were protected by the U.S. patent office. Disney knows precisely how to maximize the value of each character’s intellectual property and use it elsewhere. The characters are normally created through TV shows or movies but later enjoys a greater presence in Theme Parks and Toy Shops. As Disney created superior content, it can leverage it across a wide array of businesses. The International Licensing Industry Merchandisers’ Association (LIMA) reported that the licensing of entertainment and characters contributed retail sales of $107.2 bln, as well as 46% ($13.4 bln) in royalties from licensed merchandise. For example:

• (Movies & Entertainment to Merchandize) - Frozen was a popular Disney movie launched in 2013, generating a record-breaking $1.3 bln. Disney saw record earnings of more than $3 million in sales in Frozen-related merchandise.
• (Movies & Entertainment to Leisure) - Characters from Movies such as Toy Story, Star Wars, Indiana Jones, Pirates of the Caribbean, Mickey Mouse, Mulan and more have been added to theme parks as main attractions.
• (Movies & Entertainment to Cable & Satellite) - Many TV Series on Disney’s cable networks were born out of full-feature theatrical movies such as Hercules, Lion King, Lilo and Stich, Tarzan, Rapunzel and more.
• (Movies & Entertainment to Movies & Entertainment) - Disney’s success of character branding has also made it possible for them to create sequels to past releases. Examples include Frozen II, which hit the screens in November 2019, breaking the record by generating $1.45 bln revenue. With the impressive storyline and wonderful songs, Disney manages to expand the movie to the Broadway stage.
• (Movies & Entertainment and Cable & Satellite to Leisure) – Disney characters that have appeared in Disney video games include Disney Princesses, Mickey Mouse, Winnie the Pooh, Aladdin, Phineas and Ferb, Kim Possible and more.
• (Crossovers with Brands from Different Industries) – Disney had collaborated with ColourPop, MAC Cosmetics, SK-II and some beauty brands to create a Disney makeup and beauty product.

With superior branding, the company has been able to target its key demographics in the TV network market. Disney offers a wide range of cable networks and channels so that everyone in the family would have something suitable for them. For example, its channels include sports, children and family shows and education categories.

Source: Disney

As a result, Disney holds a dominant market position across these TV network categories. Under the cable sports networks industry, ESPN dominates the market with subscription revenue of $7.57 bln, which is more than the sum of the rest of its competitors’ subscription revenue.

Source: businessinsider

Additionally, Disney also has a significant presence with the kid audience with the Disney Channel, Disney XD and Disney Junior channels accounting for 33% market share in terms of kids viewership ahead of competitors such as Nickelodeon.

Source: Adgully

Disney has maintained an impressive track record of producing movies by leveraging its strong IP. It is able to attract great interest due to its branding and targeted audience approach. Moreover, it taps its vast portfolio built up over the years and is successful in producing sequels. For example, there are 12 movies in the Star Wars Franchise and 24 Movies in the Marvel Franchise, and movies like Mulan, Aladdin and Beauty and the Beast were remade into live action movies after gaining popularity from the animated movies. With its vast content portfolio, it has managed the incredible feat of securing 14 of the top 20 highest grossing of all time.

Source: The Numbers, IMDb

Overall, we view Disney’s ability to maximize its wide content portfolio as a major source of innovation to generate new content through remakes, sequels and franchises. This allows Disney to increase their revenue without having to increase their cost much. In addition, the vast content portfolio also helps the company to rapidly reach a wider audience across its key demographics.

Source: Disney, Khaveen Investments

Parks & Experiences Segment Will Recover Stronger than Competitors

Source: Annual Reports, Khaveen Investments

Another key area where Disney’s IP is leveraged is in the leisure segment with its theme parks and cruises. The global amusem*nt parks market accounts for $50.6 bln in 2019 and is expected to reach $99.34 bln by 2027, growing at a CAGR of 8.8%. Disney has a clear dominance in the industry with a 52% market share. The other top players include Universal Parks and Resorts, Merlin Entertainment, Six Flags, and Cedar Fair Entertainment with 12%, 4%, 3%, and 3% respectively.

Disneyland is extremely dominant in China with over 11.2 mln visitors in 2019, outranked only by Zhuhai Chimelong Ocean Kingdom, which saw 11.7 million visitors. Ever since Disney opened a park in Shanghai a number of its international competitors have planned on entering the Chinese market as well. These include Universal Studios in Beijing, Six Flags (SIX) in Tianjin, and Legoland (Merlin Entertainment) in Shanghai.

With Disney currently being the only dominant foreign amusem*nt park in China, we believe it plays heavily to the park's advantage. With the pandemic affecting the amusem*nt park industry globally, it could take Disney’s competitors significantly longer to recover. Hence, we believe that the opening of new amusem*nt parks by competitors is highly unlikely in the near future except for Universal Studios Beijing which is set to open in May 2021.

Top 10 Amusem*nt/Theme Parks Worldwide

Source: AECOM

Based on the data, Disney leads the amusem*nt park industry with 8 of the top 10 theme parks in terms of the total number of visitors in 2019. This is also evident in the tables below as they had more than double the visitors than Merlin Entertainment which secured the second spot in 2019.

Source: AECOM

Disney is also set to celebrate its 50-year anniversary in October 2021 through the introduction of a number of new rides in its parks. While these rides were expected to be operational last year, the pandemic led to a delay. The new infrastructure updates will help it further attract visitors to its parks once the restrictions ease. The company will also be leveraging on technology in order to ensure a safe reopening of its parks.

MagicBands which is given to all visitors will help the park easily track crowds with the use of sensors. The contactless nature of this band will also allow visitors to easily make payments, and pass-through gates within its parks. The Play Disney Parks app which was introduced in 2018 also ensures all visitors can play games and enjoy interactive features while waiting in queues for rides. This ensures that visitors can always be connected with the theme parks and know everything that is happening within their vicinity.

Parks in China, Tokyo, and Hong Kong have been operational since the end of 2020 under strict operating procedures. The Park in Paris is still closed with no set date to reopen yet. Based on our assumption, they should be able to have all parks operational by the end of Summer 2021. This is based on the current vaccination drive globally.

Source: Disney, Comcast, Merlin Entertainment, Six Flags, Cedar Fair Entertainment

In comparison to its competitors, Disney is also the least affected by the pandemic. With only a 37% loss in revenue as compared to its main competitors who lost an average of 79% in revenues. Disney was the least affected due to its large global presence. With parks located in various geographic regions, the company maintained a steady stream of revenues throughout 2020 with different parks operating at different capacities. The company is also set to rebound stronger post-pandemic due to its global presence.

Disney is also expanding its cruise line with the addition of three new ships. One of the cruises is expected to set sail in Summer 2022 with the other two ships set to sail in 2024 and 2025 respectively. All three ships will have a total of 1,250 staterooms. This capacity is in line with current ships owned by Disney. In 2019, the North American cruise industry had total revenues of $55.5 bln. The global industry is projected to grow at 10% CAGR from 2020 to 2027.

Overall, we view Disney as a dominant player in the theme park market due to its clear dominance in the market, presence in China, integration of contactless technology, significant global presence as well as expansion of its cruise line. Though Disney had suffered from a 37% loss compared to pre-pandemic revenue, it’s the least impacted compared to its competitors whose losses range from 70%-90%. With the company integrating contactless payments and pass-throughs within the parks, we believe that Disney is in a better position to recover and could reap more market share post-pandemic as its competitors would take a longer time to recover from the massive losses.

Source: Disney, Comcast, Merlin Entertainment, Six Flags, Cedar Fair Entertainment

Valuation

Prior to the pandemic, the company has maintained a solid track record of stable earnings and margins. Disney has a 5-year average revenue growth rate of 5.7% with an average gross and net margin of 41.8% and 13.17% respectively.

Source: Disney, Khaveen Investments

More importantly, the company has had an average FCF margin of 10.52% in the past 10 years which highlights its strong cash generation abilities. The company’s operating cash flows have grown steadily except in 2019 where it had incurred a $6.6 bln income tax expense due to the acquisition of Fox as well as in 2020 due to the decline in its overall performance.

Source: Disney, Khaveen Investments

For our revenue projections, we have broken down its revenues into its main segments namely Media Networks, Parks and Experiences and Studio Entertainment segments.

i) Direct-to Consumer

We based the segment’s revenue growth on a CAGR of 21% declining by 3% per year. The company’s DTC segment is underpinned by the strong growth momentum of Disney+, coupled with its other platforms such as Hulu and ESPN+.

Source: Disney, Khaveen Investment

ii) Studio Entertainment

For the Studio Entertainment section, we forecasted its theatrical revenues based on the number of upcoming releases multiplied with the 3-year average revenue earned by Disney per movie. However, we expect the recovery in cinemas to be gradual with the strict restrictions in place in cinemas.

*C = A x B

Source: Disney, Statista eMarketer

iii) Media Networks

The revenue projected for Media Networks is calculated by multiplying the % change of TV viewer growth by age according to the targeted audience for each channel by the revenue. The % change of TV viewer growth by age is taken from the table above. As the data is only up to 2022, we assume the % change in 2023 is the same as 2022.

Source: Disney, eMarketer, Khaveen Investments

Source: eMarketer

iv) Parks and Experiences

The revenues projected for the parks and experiences segment is based on the capacity multiplied by the average spending per person. The figures for 2021 are based on restrictions due to the pandemic. Hence, only an overall 3% growth in revenues is expected in 2021. However, we expect the revenues to grow by 95% in 2022 based on the assumption that all restrictions will be lifted and the parks and experiences will be operating at pre-pandemic levels.

Sources: Disney, Khaveen Investments

Overall, we forecast its revenues to grow by 8.5% in 2021 driven by strong streaming momentum before accelerating in 2022 with the gradual recovery in its theme parks and hotels.

Source: Disney, Khaveen Investments

Due to its strong cash flows, we valued the company based on a DCF analysis. We applied an EV/EBITDA average of its main competitors of each segment. These companies were selected due to the direct competition across cable, movie & entertainment and leisure markets.

Source: Seeking Alpha

Based on an average EV/EBITDA of 22.71x and a discount rate of 10.2%, our model shows an upside of 6.65%.

Source: Khaveen Investments

Verdict

In a nutshell, Disney maintains its market share leadership with the wide array of its content and intellectual property, and its global branding. Disney has maintained an excellent track record of producing quality content and manages to leverage and monetize these contents in other business segments. The superior content and intellectual property of Disney unlocks the potential for TV shows and merchandize, forms the basis of its famous theme parks and also creates collaboration opportunities with other prominent brands. In addition, the acquisition of 21^st Century Fox is the icing on the cake as Disney was able to expand its content ecosystem with popular titles such as Deadpool and Avatar.

As a dominant player in the theme park industry, Disney has shown great resilience in the parks and entertainment sector. Though suffering from a -37% revenue change compared to 2019, it is still outperforming its competitors who suffer at least a negative 70% and above. Regarding theme parks, we believe that Disney could rebound more quickly than its competitors, because of its strong market leadership and substantial global presence, alongside the integration of technology to adapt to the post-pandemic world which will allow it to acquire a higher market share in the industry.

While we have left out its Disney+ segment in this analysis, we also view that revenue stream as a highly significant part of Disney’s future business. Leveraging its strong IP and branding, the newly launched Disney+ appears to be an attractive streaming service which is a catalyst for the company as it continues to expand internationally and build on its content library. Overall, we rate the company as a Hold with a price target of $187.85.

Khaveen Investments is a Global Macro Quantamental Hedge Fund managing a portfolio of globally diversified investments. With a vested interest in hundreds of investments spanning diverse asset classes, countries, sectors, and industries, we wield a multifaceted investment approach that combines top-down and bottom-up methodologies, integrating global macro, fundamental, and quantitative investment strategies. We serve accredited investors throughout the globe, which include HNW Individuals, Corporates, Associations, and Institutions. At the heart of our investment prowess lies specialized expertise in cutting-edge technologies that are reshaping the fabric of numerous industries. Our strategic orientation centers around a spectrum of booming domains, encompassing the transformative realms of Artificial Intelligence, Cloud Computing, 5G, Autonomous & Electric Vehicles, FinTech, Augmented & Virtual Reality, and the Internet of Things.www.khaveen.com