Introduction:
Disney (DIS) is well-known globally for creating magical worlds and experiences for all their fans, having a long decorated history of significantly impacting the childhoods of kids worldwide. DIS clinched all 5 top spots for box office performance in 2019 (SOURCE), as a testament to their ability to narrate engaging and captivating stories to a diverse audience globally. However, DIS has recently lost its magic with sub-par performance for its films, disappointing Direct To Consumer (DTC ) subscriber numbers, and a proxy battle with an activist investor. The future growth of DIS is unstable given that linear network which contributes about 15% of their revenue is rapidly phasing out and DIS is still hemorrhaging money on DTC.
Revenue:
Disney splits their business into 3 segments. “Entertainment”, “Sports”, and “Experiences”
Linear Network
In the Dealbook Summit, Bob Iger believes that Linear Network is no longer part of the core business of DIS and should be running complimentary to other avenues of the business such as streaming.
I don’t believe Linear Networks will be present in the long run, Linear networks have a large price tag for consumers due to the long-standing price agreement between cable channels and cable distributors. On top of that, from an economic perspective, the investment into equipment required for both consumers and cable companies for Linear networks is significant so the price tag attached to Linear Networks will stay high. Compared to DTC which requires lesser investments.
According to (SOURCE). People aged <34 only accounted for 16% of total viewing minutes for linear TV. With people aged > 55 accounting for 60% of total viewing minutes. I believe this trend will persist as new consumption habits favoring DTC are cultivated in the newer generation, leading to a permanent shift in consumption patterns in the near future. I assumed that in 10 years Linear Network would contribute only 40% of the revenue it contributed in 2023. As the number of elderly declines, this leads to a fall in the economic viability of Linear Networks. At the end of my forecast, I assumed that Linear Network only contributed ⅓ of the revenue it did in 2023.
Disney+
“we have additional opportunities for improvement in our streaming business…from implementing stronger standards around account sharing. Although given the timing of our planned rollout, we don't expect a meaningful impact until 2025.” – 2023 Q4 10-K
When forecasting the number of subscribers, the main catalyst for Disney+ growth comes in the form of better user monetization, better user experience (better algorithms and UI), better content, and the consolidation of the streaming industry. DIS recently announced its plans to crack down on password sharing (SOURCE) to reach profitability.
In terms of better user experience e.g. UI, DIS has to improve it to better compete with Netflix. The user interface has to entice viewers visually within a short time or the user would lose interest. Netflix’s attempt to resolve this issue is through selective cover pictures for series based on user preference. There is also the issue of better-personalised recommendations.
In terms of better content, DIS has recently been producing lackluster films, these films receive vastly negative reviews as they’re accused of being repetitive and DIS is simply riding on their past successes instead of innovating (SOURCE). This poor quality content affects the “value” that Disney+ brings. “value” to consumers is important. Despite DIS getting the largest chunk of its revenue from the US, DIS is only the 3rd most popular streaming platform in the US. Losing out to Amazon Prime and Netflix, both provided more “value” to consumers. I believe that in my base case, it would take the streaming industry another 4 years to consolidate.
When forecasting the Churn rate, as DIS’ value bundle provides immense value to consumers when combined, it improves the churn rate for Disney+, Hulu, and ESPN+ (SOURCE). I assumed that the churn rate for Disney+, Hulu, and ESPN+ remained at 4% before declining in the later parts of my forecast due to the streaming industry consolidating (SOURCE). When the streaming industry consolidates, more people try out DIS DTC for the first time so I assumed that it would take a period before the churn rate tapers downwards.
When forecasting revenue/subscribers, I assumed that the Ad-Tier and paid tier earned similar amounts per subscriber. The difference in sales price between the tiers was made up by advertisement revenue. As the streaming industry consolidates it gives DIS stronger power to control prices.
Disney+ HotStar
Hot Star has suffered substantially as it lost the online streaming rights to India’s premier cricket league (IPL) (SOURCE). This loss in rights led to Disney+ Hotstar hemorrhaging 20 million subscribers, demonstrating the importance of sports to India. However, DIS decided to merge with another streaming giant in India, Reliance (SOURCE). Reliance which owns Viacom, was the one who managed to wrest control of streaming rights for the IPL from DIS. I believe that this merger will allow Disney+ Hotstar to regain the grounds that it lost and push its combined lead in the Indian streaming market further. The agreement for this merger is that DIS will only own 37% of the JV. But, given that this combined entity has such a large control over the streaming market I believe that this lends them a lot of powers to set prices.
The sports market is big in India, across all sports the market has a base of 600M viewers (SOURCE). Cricket which is one of the most popular sports in India, the IPL reached viewerships of 300+ million (SOURCE). I believe this number will only continue growing given the rapidly expanding population of India.
When forecasting the number of subscribers, I don’t believe that Disney+ Hotstar follows the same trend as the global Disney+. I believe the catalyst for Disney+ Hotstar’s growth comes from how effectively smartphone penetrates the Indian market (SOURCE). Taking reference from Q1 2024 Data, In my base case, they recovered all grounds it lost in terms of subscribers in 2 years. I assumed that Disney+ Hotstar experienced astronomical growth in the first 10 years. I believe 10 years is reasonable because in 10 years India would have a similar smartphone penetration rate as the US in 2024 at 92%, indicating a market that is primed and ready for the streaming revolution. This leads to a phasing out of linear TV in favor of SVOD.
When forecasting the revenue/subscriber, I assumed that DIS recovered all the pricing power it lost. In the first 10 years, while the streaming industry consolidates Disney+ Hotstar will not increase prices substantially before increasing prices to a significant extent and growing in line with the perpetual inflation rate.
Hulu
As Linear Network begins declining, I believe that the popularity of Hulu Live TV will decline as well. Some of the younger audience of Hulu will migrate to Hulu SVOD. Hulu is centered around streaming recently aired TV shows.
When forecasting the number of subscribers, I assumed that Hulu SVOD followed the same trend as Disney+.
When forecasting Revenue/Subsceirbers, as Hulu historically had very low pricing power due to the presence of Linear TV disrupting their USP, I assumed that Hulu did not raise their prices until Linear TV phased out to a very large extent 10 years into my forecast.
ESPN
“the continued strength of ESPN relative to the backdrop of notable linear industry declines demonstrates the value of sports and the power of the ESPN brand.” – 2023 Q4 10-K
The plan for ESPN is to transition from ESPN+ to ESPN DTC. ESPN+ is not ESPN’s full catalog, certain shows such as Monday night football are still locked to ESPN Cable. A major risk for ESPN is that other DTC companies like Netflix, Apple, and Amazon have started bidding for sports rights, where previously the only major player in this space was ESPN.
DIS is planning on rolling out DTC ESPN by the fall of 2025 (SOURCE). I believe that the ESPN DTC will consolidate all of the content that ESPN produces and the high churn rate due to a lack of quality sports content will decline.
When forecasting the number of subscribers, I assume that after DTC ESPN is released it will take about 3 years for the consumer to shift their habits. I also believe that DTC ESPN follows the same growth trend as Disney+
I assumed that DTC for sports would contribute about 30% of the sports revenue 10 years into my forecast and would increase to 40% of the sports revenue by the end of my forecast.
Content Sales/Licensing
I believe that each year DIS is only able to release ~10 films per year to maintain the high quality of their release. And, given the unpredictability of box office results, I forecasted Average Revenue/Film at historical averages growing in line with the perpetual inflation rate.
Experiences
“While domestic parks and experiences is expecting solid growth for the full year, that growth will be heavily back-end loaded due to continued challenging comparisons in the first half of the year from the 50th anniversary at Walt Disney World in addition to wage inflation.” – 2023 Q4 10-K
When forecasting the total acres available, Disneyland Paris is half developed, I assume it will be fully developed within the next 10 years. I also assumed that no other land acquisition would be made.
When forecasting revenue/acre available, given the large number of competing modals of entertainment e.g. AR/VR, social media. I believe that theme parks will have significantly larger competition going forward, so to avoid being too granular I forecasted Revenue/acre available to grow in line with inflation.
Cost:
When forecasting both COGS and SG&A, opting for less granularity I forecasted it as a % of historic averages.
CapEX and D&A:
DIS believes to compete with Netflix it has to lean on some of its previous series which allows for lower consumer acquisition costs. “dial back a bit on some of the spending and investment in series. And that blend of spending between films and series, we believe, gives an opportunity to increase our margins and grow the business.” – 2023 Q4 10-K
“we expect capex in fiscal 2024 to total $6 billion” – 2023 Q4 10-K
“we expect total content spend in fiscal 2024 to be approximately $25 billion” – 2023 Q4 10-K
When forecasting D&A and Content Amortization, opting for less granularity I forecasted it as a % of historic averages.
WACC:
10Y T-Bond Yield (1M Avg) = 4.30%
RFR = 4.30%
Beta (SOURCE) = 1.41
Stable Market ERP (SOURCE) = 4.60%
COE = 10.79%
DIS is rated “A” (SOURCE)
A Bond Yield (1M Avg) = 5.32%
Marginal Tax Rate = 21.00%
AT-COD = 4.20%
Stock Price (5D Avg) = $121.58
Shares O/S = 1830.32M
Market Value of Equity = 222530.31M
Weighted Average Maturity = 7 Years
FY23 Interest Expense = 1973M
Market Value of Debt = 46553.18M
%Debt = 17.30%
%Equity = 82.70%
%WACC = 9.65%
Conclusion:
Ultimately, in my base case, I value DIS at $63.39 per share. I believe that DIS is still overvalued based on the strong goodwill they have built over time which causes investors to have too much confidence in DIS. The uncertainty in DTC and how the big players are going to compete in the realm of sports resulted in DIS having a lot of risk. I believe that for DIS to live up to its value, the effectiveness of its DTC and the streaming market consolidation has to be present, for them to have a higher valuation.
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