Disney Knocks It Out Of The Park

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About: The Walt Disney Company (DIS), Includes: NFLX
by: Daniel Jones
Summary

The management team at Disney announced the launch of Disney+, a service that will effectively compete with Netflix.

This move gives the business greater control over its existing (and ever-growing) portfolio.

Though costly, the move should result in significant value creation in the long run.

Some cannibalization should occur elsewhere, but the high margins and added revenue from this will be worth it.

As one of the largest companies in the world, it may be difficult for many to imagine ways that The Walt Disney Company (DIS) can still achieve attractive growth, but management just announced a measure, soon to be launched, that should allow just that. Later this year, the company intends to roll out, in what will eventually be a global launch, Disney+. This is, essentially, the company's answer to Netflix (NFLX) and, if it is done right, should lead to significant additional value creation for shareholders in the business long term.

A look at Disney+

*Taken from The Walt Disney Company

Given its significant market presence, I would think it is a mistake for any company in the world to try and compete with Netflix. The entertainment juggernaut, at the end of last year, had an impressive 139.3 million global paid subscribers and while I don't see it losing its spot as the streaming service for the masses, there is always room for one or more niche players. To really tackle such a niche service on any meaningful scale requires itself a massive market presence and significant capital that can be allocated toward operations and growth. More importantly, it requires a sizable library of content that is appealing to a large swath of people. Few, if any, companies in the world today meet that definition with the exception of Disney. Come November 12th of this year, the company will be launching its own subscription platform, called Disney+, a move that will allow it to more directly control its library of content.

Since 2006, according to the management team at Disney, the company's Studio Entertainment segment has been responsible for the release of 44 films in movie theaters across the globe. On average, these films have generated $850 million in box office receipts, giving the business over $37 billion in box office success in a little over 12 years. That's not even close to where the firm's presence ends, though. Today, the business reaches over 100 million households and in its Disney+ release, it intends to provide users with access to over 7,500 episodes of various series, more than 100 recent movie titles, and more than 400 titles in all. As part of its investment into the platform, the company will be creating original content as well, namely 25 or more episodic series and 10 or more movies and specials.

*Taken from The Walt Disney Company

This, it should be said, will only be in the company's first year of launch. By year five, as you can see in the image above, the service will have expanded considerably, growing in-line with Disney as a whole. To get there, of course, will require significant investments into its business. The company said that through fiscal year 2020, it will have allocated more than $1 billion toward original content. By fiscal year 2024, this number will swell to the mid-$2 billion range. Meaningful operating expenses, as well, will be part of the equation. Management expects to spend less than $1 billion toward this next year, but that will swell meaningfully before the company's launch can finally achieve profitability sometime in 2024.

It's worth mentioning here that Disney+ isn't the only property the company is focused on at this time. Its launch of ESPN+ already has 2 million subscribers on it, and by 2024, this figure is expected to expand to between 8 million and 12 million. Hulu, of which Disney is a shareholder, has 25 million paid subscribers today and it's believed that this figure should grow to between 40 million and 60 million by 2024, with the service generating a peak operating loss of $1.5 billion this year and eventually turning profitable in 2023 or 2024.

These properties are great and I do believe the firm will continue to benefit from them long term, but the real value here is in Disney+, almost certainly more-so than the other two combined. This is because, according to management, Disney+ is expected to grow to between 60 million and 90 million subscribers worldwide 2024, with around one-third of its user base forecasted to be domestic, while the remaining two-thirds of users being from foreign markets.

Though this number may seem unlikely to some people, when you look at the data management provided, it's not hard to imagine such an outcome. After all, as of 2020, we should see the number of global broadband connected households come in at around 1.1 billion, up from 0.7 billion in 2015 and only 0.5 billion in 2010. Over this same 10-year window, it's expected that the number of global DTC paid video subscriptions will rise from just 30 million to an impressive 810 million (a CAGR of 37%), and the number of hours per day those subscribers will be watching, in aggregate, will expand from 20 million in 2010 to 1.2 billion (a CAGR of 50%).

This could be a boon for Disney

I have no doubt that, for a few years, the significant investments in this space will put a drag to some degree on Disney's shareholders; but, in the long run, there's a real opportunity for upside. As I type this, management has said that they intend to charge $6.99 per month for access to Disney+. This implies, by 2024, monthly revenue of between $419.4 million and $629.1 million (assuming all subscribers are month-to-month). On an annual basis, this will translate to revenue of between $5.03 billion and $7.55 billion. This assumes that the company generates no additional revenue from advertising or other means like increasing their monthly fee (they eventually will). For those wanting to subscribe for an entire year, the price will be $69.99 or about $5.83 per month, so the savings generated there could lower the aforementioned ranges to some degree but at the benefit of locking down certainty for the company and its shareholders.

Truth be told, this won't all be peaches and cream for Disney and its investors. I fully suspect that, once scale is achieved and early investments are made, the service will be incredibly high margin in nature. I also believe that, on the whole, the service will spur revenue growth for the company and create added value for investors, but one item investors will need to watch out for will be cannibalization. Early on, this won't be measurable, but as the service grows, its success will likely lead to some losses in sales from other sources, but I fully expect this to be worth the sacrifice.

Takeaway

At this moment, Disney is going through a fascinating period in its life. Driven by disruption in the tech space and emboldened by the successes seen from other streaming services, management has decided that now is the time to dive all-in on the company's own service. This strengthens the business's control over its own library of content, but, perhaps even more important, will cut out or mitigate the significance of middle-men in a way that will allow Disney and its shareholders to benefit in some big ways.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.