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Disney: Capitalizing on Weakness in the Market

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Walt Disney Studios, Paris

Disney, the world’s largest entertainment conglomerate, is currently facing challenges in the market. Despite having a market capitalization of over $150 billion, the company has seen a 30% drop from its 52-week highs. This can be attributed to the ongoing Hollywood strike and increased competition from other wealthy media companies.

However, despite these setbacks, Disney has the long-term potential to be a valuable investment. In this article, we will explore the company’s targets, its quarterly results, streaming business, theatrical releases, recent volatility, and our overall view.

Disney Targets: Focus on Growth and Original Content

Disney’s targets include regaining its core reputation and refocusing on growth. The company is prioritizing its strong brand and investing in new creative titles and outputs for its studios. While the company has been criticized for relying too heavily on sequels, we believe a focus on original content will help it recapture the magic that made Disney stand out among its competitors.

Disney Investor Presentation

Disney’s Quarterly Results: Mixed Performance

In its recent quarter, Disney experienced a tough period. While its revenue increased from $21.5 billion to $22.3 billion (a 3-4% increase), its income took a significant hit, resulting in negative diluted EPS. Adjusting for certain rules, the company’s annualized EPS declined by 5% year-over-year. With a P/E ratio in the mid-20s, Disney is not considered expensive, but it needs to address its declining performance.

Disney Investor Presentation

Disney Streaming: Improvements with Room for Growth

While Disney’s streaming business has shown improvement, there are still areas that need growth. The total number of U.S. Disney+ subscribers slightly decreased from 46.3 million to 46 million, but international subscribers grew from 58.6 million to 59.7 million. Although the company experienced a net increase of 800k subscribers, the decline in more profitable U.S. subscribers is a concern. However, the company’s expenses mainly consist of production costs, indicating that the streaming business may not be a major growth driver but also not a significant cost for the company

Disney Investor Presentation

Disney Theatrical Release: Exciting Potential

Disney has several exciting theatrical releases in the works, assuming it can resolve the outstanding strike. Highly anticipated titles such as “Inside Out 2,” “Snow White,” and “Kingdom of the Planet of the Apes” are set to hit theaters in 2024. Additionally, the release of Marvel films during the holiday season is expected to generate excitement. Although the theatrical business has been impacted by COVID-19, these upcoming releases could give Disney a much-needed boost and provide new content for its parks.

Disney Investor Presentation

Disney’s Recent Volatility: Navigating a Changing Landscape

Disney has experienced recent volatility due to its efforts to reposition itself in the market. One example of this is the rumors surrounding a potential spin-off of ABC. While the company has a $10 billion offer on the table, it has yet to make a decision. We believe that accepting this offer would be a smart move for Disney, allowing it to shift away from a declining cable business and focus on the future of the industry. However, avoiding the sale could result in internal conflicts that hinder the company’s ability to adapt.

Another recent example of volatility is the Hollywood strike, which has highlighted the use of AI in the entertainment industry. While initially a contentious issue, the strike has ended with a deal in place. This demonstrates Disney’s ability to navigate challenges and adapt to changing circumstances.

Our View: Disney’s Transition and Potential

Disney is currently in a transitional phase. The company’s reputation as an entertainment powerhouse has weakened due to its focus on sequels and the increasing competition in the market. Cable used to be a strong revenue source for Disney, but as the industry shifts towards streaming, the company needs to reorient its business successfully.

Despite these challenges, Disney still has strong potential to outperform. Its park business continues to generate solid earnings, and the company is doubling its investment in this sector. While Disney+ may not fully replace the revenue from cable, it remains a core differentiated business with room for growth. Overall, the company’s reduced share price presents an opportunity for long-term shareholder returns as Disney focuses on what it does best.

Risks to Consider

The main risk to our thesis is Disney’s ability to build up its direct-to-consumer (DTC) business while experiencing a decline in its core cable business. ESPN, one of Disney’s most popular assets, was a significant revenue driver in the cable era. However, with the decline of cable, Disney will need to find alternative ways to replace that revenue. The company’s success in navigating this transition will determine its future position in the market.

In conclusion, although Disney has faced challenges and changes in the market, it still retains its status as a legendary entertainment company. While it may not reach the same level of success as it did in the past, Disney’s differentiated businesses, such as its Parks segment, are expected to contribute to its overall earnings. By focusing on its strengths and adapting to the evolving industry, Disney has the potential to capitalize on its weaknesses and deliver long-term value to shareholders.

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