Comparing Disney+ Valuation Multiples To Netflix's
- We believe Disney is currently overvalued, but that changes to structure might unlock future value for the Disney Direct-to-Consumer segment.
- Disney+’s limited content library can be the cause of disappointing subscriber growth when compared to Netflix's metrics.
- Our analysis shows that comparing Disney DTC to Netflix is not sustainable given Disney's limited content library, that much focuses on Marvel and Star Wars, compared to Netflix's wider range.
Upon launch, Disney+ had astounding growth, which has continued until Q3 2021, where subscriber growth has drastically decreased, leading to Disney (NYSE:DIS) missing street expectations and a plunge in share price. Despite disappointing subscription growth, Disney is closing to Netflix subscriber figure, which stands at 214 mln compared to Disney's direct-to-consumer (DTC) platforms aggregate 179 mln. The market value of the Disney DTC segment seems to be much less compared to that of Netflix (NFLX). Netflix's current market capitalization is $289 bln. At the same time, Disney only reaches a current market capitalization of $274 bln despite its many other segments, including theme parks, cruise ships, and motion pictures for cinema distribution. This opens the discussion if Disney is hugely undervalued, which this analysis aims to address relying on Asset Value, Earnings Power Value, and SaaS valuation of the Disney DTC segment.
Our valuation concludes the opposite; the Disney share is overvalued. Disney DTC's value is limited by several factors which hinder it from reaching current Netflix valuation metrics.
The Disney Entertainment and Media Conglomerate
Launched in November 2019, Disney+'s subscriber count reached ten mln on its first day and more than 73 mln in its first year. This interest staggered Disney, which had set its aim to reach 60-90 mln subscribers by 2024. July 2021, the subscriber count across all platforms (Disney+, ESPN+, and Hulu) was around 179 mln subscribers. To secure the successful launch of Disney+, Disney bought BAMTech in 2017 to acquire its streaming infrastructure; and 21st Century Fox in 2019 to increase the content library. Through these acquisitions, they also gained a controlling interest in Hulu. The purchase of BAMTech allowed the launch of ESPN+ in 2018.
On top of the sizeable direct-to-consumer segment, Disney is also segmented into Media Networks, which include cable networks like Disney Channel, ESPN, and National Geographic; Parks, Experiences and Products, Disney cruise line (currently operating four cruise liners and three to be delivered) and licensing (tradenames, characters, and other intellectual property); and Studio Entertainment (production and distribution of motion pictures).
Disney guidance has been updated to Disney+, reaching 230-260 mln subscribers by the end of 2024, and total paid subscriptions around 300-350 mln by the same time. With the disappointing growth in Q4 2021 of merely 2.1 million subscriber growth on Disney+, the market has rising concerns on the expected subscriber count. During the same period, Netflix added 4.4 mln subscribers, much due to the popularity of Squid Game.
2020 revenue generated by Netflix almost reached $25 bln, while Disney DTC almost reached $17 bln. Disney DTC, due to high operating expenses, had a negative operating margin since 2019. Oppositely, Netflix has increased its operating margin, reporting a healthy margin of 22.76% in the last quarter. Netflix does also have a higher average annual revenue per subscriber than Disney ($130 vs $102).
Based on Netflix's market capitalization of $288.71 bln and revenue of $28.63 bln in the last twelve months, it is currently selling at a price to sales ratio of 10. Applying the same multiple to Disney's DTC sales of $16.97 bln in 2020, it would have a market capitalization of $169.67 bln, representing 61.9% of its current market capitalization. Below is presented a sensitivity analysis to get an idea of what the market capitalization of the segment would be.
Source: Moat Investing
User-based valuation by Damodaran is a more detailed SaaS valuation considering churn rate, CAC, Average revenue per user, and customer lifetime value to arrive at a valuation of the service. The churn rate for Disney+ is assumed to be lower than that of Hulu, while ESPN+ accounts for the highest churn; a weighted average is used in the calculations based on subscribers. Based on the assumed churn rate, the customer lifetime is 5.7 years. Assumptions on net subscribers added are based on Disney guidance to reach 300-350 mln subscribers by the end of 2024. The discount rate when calculating existing users is 9% (WACC) and 15% for future users to account for the higher risk and uncertainty in these calculations. These calculations give Disney DTC a market value of 164 bln.
Source: Moat Investing
AV & EPV Valuation
In order to calculate the asset value, we have adjusted for credit losses by adding back the reserve; adjusted licensed content costs to represent better future value; depreciated attractions, buildings, and equipment to be conservative; intangible assets are recalculated to include brand value and the value of current subscribers; goodwill is cautiously removed in full; and lastly, the value of existing employees is calculated based on recruiting fees. Liabilities related to tax and employees are removed on the liabilities side of the balance sheet.
Source: Moat Investing
The earnings power value relies on the average revenue in the past seven years. Capital expenditure has been adjusted to factor in the purchase of three cruise liners and the acquisition of 21st Century Fox, being one of the largest of that decade.
Source: Moat Investing
The EPV per share is a lot higher than the AV, and this is to be expected as Disney has a moat and thus should be trading at a premium to the asset value. However, our EPV valuation does not reach that of the market. We think Disney stock is overvalued.
Can Disney DTC reach Netflix's valuation metrics?
We believe Disney could benefit from a business breakup in order to unlock each specific division value and partially offset the conglomerate discount. When conglomerates become very large-scale, there is a risk of inefficiency.
Disney could manage a breakup in different ways, (1) spinning off the DCT segment to give it the attention and focus it needs to grow, or (2) spinning off the Parks, Experiences, and Products segment, as this is the segment with lower margins and it could also benefit from more focus. These are just two examples of how an increased focus on a specific division could unlock shareholder value.
To expect Disney DTC to be worth as much as Netflix may be misleading as they have different dynamics. Disney+ subscription is cheaper than Netflix subscription, and Disney cannot compete in terms of content; while Netflix offers more than 15,000 titles, Disney+ offers less than 10,000. Not only does Netflix offer more titles, but it also provides a broader range. In 2021 Netflix expects to spend $17 billion on content, while Disney DTC expects content spending for 2024 to be between $14-16 billion. This could mean that Disney is not focusing as much as Netflix on producing original content exclusive to its platforms.
Investors may argue that the DTC segment of Disney's worth is enough to motivate the purchase of the shares. The other segments might look almost like a free gift if we assume that the DTC segment deserves Netflix valuation metrics. Our analysis shows that comparing Disney DTC to Netflix is not sustainable given Disney limited content library, that much focuses on Marvel and Star Wars, compared to Netflix's wider range. Our valuation models point in the same direction as they arrive at a value per share lower than the current market value.
We think the Disney share is currently overvalued. For the full value of Disney DTC to be unlocked, we would like to see a breakup. We think it would increase shareholder value as the segments could be more focused and efficient.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.
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