Disney Investment Thesis

Disney Investment Thesis: Whether the economy is thriving or in crisis, one thing stays the same: Disney has a permanent place on Forbes’ list of the World’s Most Valuable brands. It’s the only leisure company to hold a spot in the top 10, joining names like McDonald’s (MCD), Louis Vuitton, Coca-Cola (KO), and Facebook (FB). 

With that said, it’s true Disney had a difficult 2020. The COVID-19 pandemic decimated large parts of the business. First, Disney share price went from approximately $140 per share to just $85 per share when the market crashed in March 2020. Then, theme parks and movie theaters closed for a period. When some were able to reopen, it was at limited capacity. 

According to CNBC, Disney was essentially “hemorrhaging money since the outbreak,” and the company was forced to lay off 28,000 employees in early October. That news, combined with several other developments, allowed share prices to fully recover by November 2020. 

Since then, Disney stock has been trending upwards, and that has new investors curious. If Disney can generate this much growth before parks, resorts, and movie theaters are back to business-as-usual, what does the future hold? In other words, is Disney stock a buy? 

Analysts say yes – and the Disney investment thesis is compelling. Here’s what you need to know. 

Disney Market Share Has Accelerated

The Walt Disney Company has businesses in multiple industries, from theme parks and resorts to at-home streaming services. Calculating market share requires a closer look at the organization’s major divisions. 

The most remarkable story comes from Disney+, which launched in mid-November of 2019. Whether because of the pandemic or in spite of it, Disney+ grew its subscriber base shockingly fast. Today, it is four years ahead of schedule in terms of member enrollments. 

At the end of 2020, Disney+ had six percent of the streaming market. At first glance, that isn’t impressive when compared to Netflix’s 28 percent. However, Netflix’s market share came down three percent year-over-year. That suggests Disney+ is making inroads. 

At its current rate, Disney+ is likely to surpass Netflix in terms of subscribers within a few years. When Netflix announced its 2020 year-end numbers, it was at 203.67 million paid members. Disney+ is projecting between 230 and 260 million subscribers by 2024.

A look at Disney’s share of the movie box office market paints another impressive picture – assuming 2020 is left out of the equation. In 2019, Disney releases made up 33.1 percent of box office earnings in North America. That dropped to 11.5 percent in 2020, but the drop is expected to be temporary. 

Disney theme parks also took a big hit in 2020, but the industry as a whole is expected to recover and grow through 2026. That’s good news for Disney and its investors, considering Disney controls nearly half of the total market. 

These positions represent just a fraction of Disney’s total business. It owns a long list of media and entertainment companies that include ESPN, National Geographic and the ABC broadcast television network.

In addition, it has an entire unit devoted to content licensing and sales. By many measures, Disney is a winner in nearly every market where it has a presence.  

Does Disney Stock Have a Moat?

Any review of the Disney investment thesis must include discussion of the company’s moat. However, the question is less “does Disney stock have a moat?” and more “can any company boast a moat as wide as Disney’s?”

The company’s brand is its first and most valuable asset – the Disney brand creates a moat on its own. However, the Walt Disney Company has other unique features that create an unbeatable economic moat. 

Specifically, the size and scope of the company’s combined businesses are more valuable than the individual business units. Many are interconnected and reliant on each other – but they also support each other through economic ups and downs. 

Disney films, theme parks, licensing, and streaming services rely on an underlying set of entertainment assets – movie franchises, individual films, and characters that have captured the world’s imagination. It would take generations for another company to develop the same level of passion sparked by the likes of Star Wars, Cinderella, and the entire Marvel Universe – assuming it is possible at all.  

Is Disney Growing Revenues?

Aside from the anomaly that was 2020, Disney revenues have grown steadily in recent years. A 10-year history shows the following results: 

• Fiscal 2020 – $65.4 billion
• Fiscal 2019 – $69.6 billion
• Fiscal 2018 – $59.4 billion
• Fiscal 2017 – $55.1 billion
• Fiscal 2016 – $55.6 billion
• Fiscal 2015 – $52.5 billion
• Fiscal 2014 – $48.8 billion
• Fiscal 2013 – $45 billion
• Fiscal 2012 – $42.3 billion
• Fiscal 2011 – $40.9 billion

It’s interesting to note that even in 2020 – a period during which the company was “hemorrhaging money” – the year-over-year decline in revenue was just 6.06 percent. 

What Rate Are Disney Earnings Growing?

The picture painted by Disney’s earnings per share isn’t quite as positive as its revenues. Disney had a couple of down years, and they weren’t all COVID-related. The past decade of earnings per share results look like this: 

• 2020 Annual Earnings per Share – $-1.58
• 2019 Annual Earnings per Share – $6.64
• 2018 Annual Earnings per Share – $8.36
• 2017 Annual Earnings per Share – $5.69
• 2016 Annual Earnings per Share – $5.73
• 2015 Annual Earnings per Share – $4.90
• 2014 Annual Earnings per Share – $4.26
• 2013 Annual Earnings per Share – $3.38
• 2012 Annual Earnings per Share – $3.13
• 2011 Annual Earnings per Share – $2.52

Given its long history of gains, most investors are comfortable that even though earnings per share occasionally dip, on the whole, the figures are trending upwards and will recover within the next 12 – 24 months.

Robert Iger’s Final Act Might Be His Best

Disney’s leadership team is often recognized among the best in the business. Executive Chairman and Chairman of the Board Robert Iger served as CEO for 15 years – through February 2020 – before handing the CEO title over to Bob Chapek, a 30-year veteran of the company. 

While Iger was in the CEO seat, he acquired Pixar, Marvel, Lucasfilm, and 21st Century Fox. In addition, he expanded the business into new markets. For example, he opened Disney’s Shanghai park and resort.

Iger’s most important legacy may be the launch of Disney+. Most expect the streaming service to drive a substantial portion of Disney’s long-term growth.

Chapek was barely in his new role a month before the pandemic took over and the economy tanked. Perhaps he doesn’t have a collection of acquisitions and record-breaking films to boast about quite yet, but his ability to steer the company through one of the most trying times in its history is telling.

There is little doubt that Disney will come out intact on the other side, and Chapek can take some of the credit for that. 

Headwinds Facing Disney

Disney’s stock has recovered since the March 2020 market crash, and it has neared all-time highs. Much of that is based on the company’s success in adapting to the unusual environment presented by the pandemic. For example, the company found a way to release and capitalize on big-budget films like the live-action Mulan though movie theaters were closed. 

Part of the stock’s price trend is based on expectations for the company once the world returns to business-as-usual. The revenues lost during park, resort, and theater closures will pick up – and perhaps swell in response to pent-up demand. 

The biggest headwinds facing Disney remain pandemic-related. Until the world achieves herd immunity, there will be some hesitation around traveling and spending time in crowds. In addition, the timeline for fully extinguishing COVID-19 is decidedly uncertain. That creates a difficult environment within which to run a leading entertainment and leisure company. 

Disney Investment Thesis Conclusion

The bottom line is that Disney stock is a smart buy, particularly over the long term. The company holds a leadership position in multiple industries, and it is rapidly taking over new ones. The most notable advantage that Disney and its shareholders have is that other media, entertainment, and leisure companies simply can’t compete.

While they may pull a bit of market share away from Disney now and then, Disney always comes out on top due to the strength of its brand and its internal ecosystem. 

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.