The Walt Disney Company is a diversified entertainment company that operates in three segments: Entertainment, Sports and Experiences. The Entertainment segment encompasses the Company's non-sports focused global film, television, and direct-to-consumer (DTC) video streaming content production and distribution activities. The Sports segment encompasses the Company's sports-focused global television and DTC video streaming content production and distribution activities Experiences segment includes Parks and Experiences and Consumer Products.
Investment Overview
Magical flywheel effect continues as long as intellectual property portfolio remains robust. Disney’s core strategy and business is built upon a virtuous cycle where different parts of the business are highly synergistic and complementary. Disney owns the intellectual property for its characters, movies, and shows. This then serves as a direct advertisement and is leverageable for its theme parks and resorts which are which provides an additional revenue stream. Moreover, Disney also sells merchandise based on the same characters, movies and shows which cultivates a deeper affinity with the Disney brand. Essentially, the flywheel effect describes how each the segments of Disney business work together as a whole, enhances the overall prospects of the group. For the flywheel effect to continue, we believe that Disney needs to retain its strong intellectual property portfolio and story characters need to be popular with the masses.
Streaming to see the light; on path to profitability by 4Q24. Core subscribers has crossed 112m as at end FY23 since the launch of Disney plus in 2019. Ad-supported Disney+ offerings have also been gaining traction, reaching 5.2m subscribers in end 4Q23 with a 34% increase in time spent on the platform. In the face of mounting ballooning content costs and saturation in the market, we believe that the focus has shifted from pure subscriber growth to ARPU (average revenue per user) expansion. DTC (direct-to-consumer) revenues will be the key driver of growth at 11% CAGR between FY23-27, with share of total revenues increasing from 22% to 29% within 2023 and 2027. The fog appears to be lifting for streaming with operating losses expected to narrow in FY24 followed by sustained profitability from FY25 onward – consensus sees DTC operating margins at 10% in FY27, up from -3% in FY24. We note that this is still substantially lower than streaming leader Netflix with operating margins forecasted at 23% in FY24. We believe long term profitability will be underpinned by periodic increases in pricing, content spend rationalisation, and subscriber additions.
Free cashflow’s wind in the sail goes on; sustained by cashflow generative experiences business. Disney’s experiences segment which primarily comprises parks & experiences accounts for 37% of FY23 revenue and has doubled its return on invested capital in the past five years. Disney remains focused on turbocharging growth in Experiences through strategic investments, aligned to consensus expectations of 6% CAGR at the topline between FY23-27. Experiences is expected to command a substantially higher operating margin of 30% compared to 10% for DTC and Sports in FY27. Operating margins for linear networks are presently higher at 35% as at end FY23 but would dip to 27% as changes in consumer preferences drive the pivot away from legacy TV. Taken altogether, the street expects Disney’s free cashflow to grow at a CAGR of 24% between FY23-FY27.
BUY Disney with a TP of US$134. We derive our TP based on 23x CY24/25 earnings which is at the historical mean. Disney is on a path to profitability by 4Q24 and should sustainability turn profitable by FY25 onwards. We believe the experiences segment will continue to be robust, with strategic investments towards new capacity driving long term growth.
Risks
Severe and prolonged recessions that significantly impacts the Experiences and Entertainment segment. More cautious spending on discretionary goods and services may lead to weaker demand for theme park attractions as well as streaming subscriptions. Failure to generate appealing content in the DTC sub-segment may also lead to a decline in market share and subscriber losses.
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