Disney: Bullish or Bearish?

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Today I'll be providing a brief bull vs. bear debate on The Walt Disney Company.

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Now, for today's piece:

Disney: Bullish or Bearish?

Highlights

• Disney owns a broad portfolio of successful franchises, networks, and theme parks, is it enough to be bullish?

• Disney is under pressure from the government of Florida.

• Disney+ streaming is not yet profitable and the streaming landscape is becoming more competitive.

Some Background On Disney

The Walt Disney Corporation (NYSE: DIS) is an American entertainment and media conglomerate. It was founded in 1923 and is a member of the Dow Jones Industrial Average.

In 2022 the stock fell 44.58%. So far in 2023 the stock is up 11.72%.

The Bull Case

Strong Intellectual Property

It’s hard to find a company with intellectual property as strong as Disney.

The company owns a broad portfolio of extremely successful franchises such as Pixar, Marvel, and Star Wars. In addition, Disney has its classic characters like Mickey & Minnie Mouse.

Merchandise and licensing combined brought in $8.15 billion in 2022.

That’s some undeniably strong intellectual property!

TV Networks

Disney also owns the networks of ABC, ESPN, Freeform, and National Geographic.

I think ESPN gives Disney a unique moat with the live sports component, something that most networks can’t offer or afford. Sports fans are generally very loyal to their team and will watch them by any means necessary.

In addition, Disney has a 50% stake in Lifetime, A&E, and The History Channel.

A well diversified portfolio of networks in my opinion.

Parks Attendance Increasing

2022 has been a bounce-back year for travel and Disney is reaping the benefits. Theme Park revenue came in at a staggering $28 billion for 2022 and which is up 73% year over year. If COVID-19 remains manageable, we may see an increase in all of Disney's entertainment offerings: theme parks, cruises, dining, hotels, and more.

Movies In The Pipeline

Coming off a strong Avatar 2 release, Disney has no expectations of slowing down in 2023.

They’ve slated movies such as Antman and the Wasp, The Little Mermaid, Guardians of the Galaxy Volume 3, and Indiana Jones for 2023. These sequels and remakes will likely perform well based on the success of prior movies.

(Personally I’m sick of everything being a remake or sequel but it doesn’t seem to matter at the box office). 

The Bear Case

High Valuation

Disney stock is trading at a Trailing P/E of 56.86x which I consider incredibly steep. Forward P/E is 24.4x which may still be a little expensive. Is there enough growth on the horizon to warrant these ratios?

If you missed my last issue on Trailing and Forward P/E, you can read it here.

CEO Uncertainty

Former CEO Bob Chapek was replaced abruptly in November of 2022 by former CEO Bob Iger. I’m not sure what Iger is planning to do differently since the goal for the business is still to make Disney+ profitable.

Who knows how long Iger will remain CEO and what is the plan for his replacement?

Reedy Creek

In 2022, Disney entered a highly publicized spat with Florida Governor Ron DeSantis over the Parental Rights Education Bill. As a result, Disney will lose its ability to operate autonomously in the Reedy Creek District.

What is Reedy Creek?

Since 1967, Disney has been allowed by the state of Florida to operate Walt Disney World as an autonomous county known as Reedy Creek. This means that Disney has been creating and maintaining its own roads and buildings and staffing its own first responders.

This has allowed Disney to avoid relying on the slow processes of state-led public works and scale at its own pace. Going forward, Disney will be subject to Florida's infrastructure departments and will no longer be able to establish roads and buildings as quickly as they have in the past.

Lots of red tape is incoming.

The Dividend Is Still Suspended

Disney suspended its dividend in July 2020.

Before the suspension, Disney paid an $0.88 annual dividend and kept its payout ratio between 20-30%. If Disney were to resume paying a dividend, here's what it would look like (data from Seeking Alpha).

While they’ve said they want to reinstate the dividend, it’s unclear when or if that will happen.

Disney's Streaming Offerings Are Not Profitable

Management has stated that making Disney+ profitable by 2024 is the goal.

In the most recent earnings call, management released that Disney's host of streaming products resulted in $4 billion worth of operating losses.

If streaming is going to be the next leg of growth for Disney, it must become profitable.

That goal is becoming harder to reach and when compared to streaming competitors, Disney is spending much more money and operating at a much higher loss.

Losses are expected to continue and that makes me very uneasy. 2024 profitability is looking very unlikely.

@ecommerceshares on Twitter posted some great analysis comparing Disney's inefficiencies to its competitor Netflix.

Notice how Netflix spends 30% less on "Other Expenses" and generates 61% more revenue. It's worth noting that Disney also has an extensive backlog of content to lean on, whereas Netflix has to produce more original content and doesn't have established characters and franchises like Disney.

Streaming Is More Competitive

In the early days of streaming, you really only had one option for content and that was Netflix.

Today we have various streaming apps to choose from: Netflix, Disney+, Paramount+, Peacock, Apple TV+, and HBO Max to name a few.

Attention is limited and all these companies are competing for eyeballs — what will make Disney+ stand out?

What’s The Next Step?

What will be the future growth drivers for Disney?

Will it be...

• Disney+?

• Theme park attractions?

• New movie franchises?

The future of Disney's business is unclear to me, and until I see future growth drivers manifest themselves, I'm cautious.

Final Thoughts

Disney is a household name, even my grandmother from another country could tell you who Mickey Mouse is.

Unfortunately, brand awareness ≠ profits.

Disney has many positives going for it: brand loyalty, diversified revenue streams, and a variety of vacation experiences.

It also has many negatives: management uncertainty, hinging the business’s growth on an unprofitable streaming service, and the loss of its special district.

There’s a lot to love and a lot to be cautious about when it comes to Disney’s stock. Personally, it’s not a risk I’m willing to have in my portfolio, especially since there’s no dividend to keep the cash flow coming in while I wait.

I'm bearish in part because I don't see Disney+ providing enough future growth to make today's valuation worth it. to me, Disney is a classic example of how a good product ≠ a good investment.

Valuation and future growth prospects matter.

What do you think about Disney? Are you bullish? Are you bearish?

Vote below using the new poll feature!

Links & Memes

JPOW has a long way to go with rate hikes, especially after he sees this:

With all this talk about Chat GPT, we can't forget about the OG:

These kangaroos are exactly the same as my brother and I were growing up:

Perfect thread for this Disney article:

Doug Boneparth is the king of dad jokes:

Why the fuck would anyone get that close to this drain? 😂

This is actually the funniest thing I've read all year:

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Disclosure: The contents of this newsletter are in no way intended to provide financial advice. Dr. Dividend may have positions in any of the stocks mentioned and this newsletter is in no way intended to promote buying or selling of any security. Please do your own research before investing in anything.