I really don’t think Disney needs an introduction, I mean they have so much IP, it’s insane!
But while the company has theme parks and has a seemingly endless supply of content in the form of movies, the big focus for this company has been Disney+. And how can it not be…it allows them to deliver content directly to consumer, it has higher margins at scale, and has plenty of runway for growth as Disney+ is currently in only 1/3 of the countries, albeit the larger ones, where Netflix is available.
Now I had Disney in the portfolio for a while, but decided to let go of it around $180 due to what I viewed as them trading at higher than historical multiples.
With the pullback after Q3 earnings, I wanted to go ahead and re-evaluate as this one is on the watchlist looking to re-enter at more attractive prices.
Stock Profile & Recent Performance
Year to date, Disney has been struggling when it comes to their stock’s performance while the rest of the market has done pretty well. I think a major part of that is at the end of 2020 and beginning of 2021 it had a huge leg up on the hype around Disney+. This took their multiples to historically high levels and for a company that has a rather already large market cap, it takes a lot of growth to push the needle.
This stalwart though is one that I believe with be a media juggernaut for a very long time and outside of a pandemic their earnings should be relatively smooth. They have the brands and deep pockets to keep making great content. Great content means attention (which is extremely valuable) and loyal fans.
It seems as though the street did not like Q3 earnings as the main focus is on decelerating streaming growth. Which makes sense as it has taken on a higher growth multiple because of that high streaming growth early on.
Estimates: FactSet analysts saw Disney earnings of 52 cents a share, swinging from a loss of 20 cents in the year-ago quarter. Revenue was expected to rise 28% to $18.8 billion. FactSet forecast Disney+ subscribers to grow 8.8% to roughly 126.2 million.
Results: Adjusted EPS of 37 cents for Q4 on revenue of $18.53 billion, in the first quarter in which all of its parks were reopened since the pandemic started. Streaming service Disney+ added 2.1 million subscribers for a total of 118.1 million, well below views.
You see that the subscriber miss is what is causing panic, because that is supposed to be the growth fuel.
Q3 Financials & Q3 Guidance
Alright, so what has changed since the video I made back in July? Well we get another quarter of results locked in and we have newer forward guidance to look at.
High Level Numbers
Looking at 2020 vs. 2021 it seems like it relatively flat, which is actually a bit surprising. I guess the recovery of the parks is still happening and the additional revenue from streaming/media distribution isn’t able to completely offset those losses. The decrease in free cash flow was due to higher spending for film and television content and cash tax payments.
If I go back to 2019, revenues from parks was about $26 billion, so that means they are down around $10 billion from a couple years ago when a pandemic and constraints were not a thing. I think given enough time and the pandemic subsiding, that these revenues will easily funnel right back into their business.
I wanted to point out the overall growth in the media business is due to that direct to consumer segment as content sales/licensing saw a year over year decrease.
Disney did reiterate its guidance for reaching 230-260 million Disney+ subscribers by the end of fiscal year 2024. In order to get to that range the growth rate of subscribers would need to be around 25-30% CAGR.
That is a little bit more of an uphill battle looking at the1.8% increase in subscriber numbers from the last quarter. But overall the yearly growth was around 60%, so I think the fear around subscriber growth is valid.
I think in order to try to hit more growth the company may invest more into content creation and that increase in spending to cause lower cash flows may stick around.
We can see one positive is that the company was able to hike the pricing per subscriber across all segments except Disney+.
I went ahead and factored in a large increase in parks revenue a gain of around 30% revenue for Disney plus and around 10% growth to all other segments as an assumption which lands me at around $82 billion for FY 2022. I also assume a rise in operating margins higher than the 5.6% for fiscal year 2021 but not to it’s historical levels until 2024-2025 range as I feel like they may keep spending around safety at parks and slowly lean off Covid related spend and also increase spending around content creation.
I come to a fair value at around $170 with the above assumptions which I think are leaning a little bit more bullish even after seeing the slow down in Disney plus and not really knowing when parks will recover back to full capacity.
I am still passing on Disney as this quarter highlights the deceleration in growth and that parks are still under pressure. I think around $145-$150 over the coming months or 1st half of 2021 where it would make sense to add to this media juggernaut.
I think it comes down to a matter of when they recover and hit their subscriber targets. I would never bet against Disney long term and if I had shares would probably just hold on at this point. $160 is still probably a decent entry long term, but I want it a little cheaper 🙂 There may be more pain if they have another slow quarter of growth and park numbers don’t recover fast enough.
If you would like to download the DCF excel model, check out the Patreon!