The prospects for Walt Disney Co. (NYSE: DIS) have improved recently on strong results of its operating businesses and hope about its new streaming service. Its challenge in this new, competitive business is whether it can reach the size of Netflix and the Amazon Prime streaming services.
The company was founded in 1923. It was almost immediately a well-known media company. Early on, this was largely due to the success of Mickey Mouse, created in 1928. He is still a favorite character among children all over the world.
Traditional Businesses Stay Successful
Disney has a few primary businesses. These include television content, primarily ABC, EPSN and the Disney Channel.
It also operates a series of theme parks and resorts. The best known of these are Walt Disney World and Disneyland. The company operates huge parks in Shanghai and Paris as well.
The company’s real strength is its studio operations, which include Pixar, Marvel, Lucasfilm and 20th Century Fox, now known as 20th Century Studios. The Disney studio figures for 2019 were staggering, both because of the market share and the revenue.
The studio operations posted revenue that was 40% of the total U.S. box office. It hit $3.7 billion, an all-time record. It had the record in 2018 as well, at $3.1 billion. Some of Disney’s best movies have been major blockbusters.
Growth Through Mergers and Acquisition
Disney has made several acquisitions that have been critical to its growth.
The first important buyout was of Capital Cities/ABC in 1995. This brought Disney one of the big three television networks, the others being NBC and CBS. ESPN, the world’s largest sports network, was also part of the transaction. The price was $19 billion.
In 2006, Disney bought Pixar for $7.6 billion. This brought Disney the Toy Story franchise, among others. Apple founder Steve Jobs was among the Pixar owners.
In 2009, Disney bought Marvel Entertainment for $4.2 billion. This studio has produced some of Disney’s biggest box office winners, including “The Avengers” and “Black Panther.”
In 2012, Disney bought Lucasfilm, which brought with it the Star Wars franchise. The price was $4.0 billion. Star Wars has created some of the most popular movie characters in film history.
By far, Disney’s biggest deal was the buyout of most of the assets of billionaire media mogul Rupert Murdoch’s 21st Century Fox. The deal was presented to investors as a merger, the value of which was $71.3 billion. Murdoch kept several properties, including Fox News and Fox Sports
The day the deal closed, Disney CEO Robert A. Iger, said:
This is an extraordinary and historic moment for us—one that will create significant long-term value for our company and our shareholders. Combining Disney’s and 21st Century Fox’s wealth of creative content and proven talent creates the preeminent global entertainment company, well positioned to lead in an incredibly dynamic and transformative era.
What Is the Transformation?
Disney got two things, beyond a larger scale business, as it took over management of 21st Century Fox assets.
The first of these is cost cuts. Two media companies with billions of dollars in revenue from similar businesses have overlap in management and central services, like accounting. This means layoffs, which will mean tens of millions of dollars in savings.
The bigger play is streaming video. This arena has been dominated for years by Netflix and Amazon. More recently, large media companies like AT&T and YouTube joined the fray. Disney believed it had enough video assets to launch a business of its own.
Disney+ was launched late last year. The service has exclusive use of the Disney, Pixar, Marvel, Star Wars and National Geographic archives. It has a large amount of programming for both children and adults. After its first day available, the service had 10 million subscribers.
Disney+ has a subscription price of $6.99 a month. This is less than both Amazon and Netflix. Some analysts believe Disney could reach 100 million subscribers by 2025. If that is true, the figure is near where Amazon is today.
With any luck, the streaming business will hit those numbers more quickly because Disney will reach 100 years old in 2023. It will be a remarkable milestone.
At the time of the Disney+ streaming launch, Morningstar analyst Neil Macker commented on the company’s efforts to draw in subscribers:
The firm’s direct-to-consumer efforts, Hulu, ESPN+, and Disney+, will benefit from the new content being created at Disney and Fox television and film studios as well as the deep libraries at the studios. We expect that Disney+ will leverage this content to again create a large, valuable subscriber base.
How Has the Stock Done?
Disney’s market capitalization is about $260 billion.
The stock has outperformed the market recently. Its share price has risen 29% in the past year. The S&P 500, representative of the balance of the stock market, was up 16% over the same period. Because it is one of the 30 Dow Jones industrial average components, Disney is part of a number of index funds.
How Is Disney Financially?
Disney’s revenue has risen sharply over the past several years, due in part to its mergers and acquisitions efforts. In 2016, its revenue was $55.6 billion. It was nearly flat in 2017 but jumped to $59.4 billion in 2018. In 2019, that number reached $69.6 billion.
Net income was $9.4 billion in 2016. It was $9 billion in 2017, $12.6 billion in 2018 and $11.1 billion in 2019. Again due in part to mergers, its long-term debt rose to $38.0 billion last year from $16.4 billion in 2016.
How Does Wall Street Look at Disney?
On the whole, Wall Street analysts believe that Disney has outflanked rivals like CBS and AT&T, the latter of which owns the assets of Time Warner. One reason is the sheer size of Disney’s library.
Another reason is the power of the Disney brand. BrandZ recently rated Disney as the world’s 14th most valuable brand at $40 billion. No other media company was higher on the list.
Professional stock researchers also tend to like Disney’s prospects. Moody’s pointed to the early strength of the new streaming business as it moved over 10 million subscribers.
The Wall Street Journal recently commented that, of the 26 analysts who follow Disney, 18 rate it as a Buy. The average target share price among them was $154. However, at the high end, the figure was $175. At that level, Disney stock would be up another 22%.
The Man Who Changed Disney
Bob Iger has been the chief executive officer of Disney since 2005. He joined the company when it bought Cap Cities. Virtually all of Disney’s major expansion has happened on his watch. While Walt Disney founded the company, Iger made it unimaginably successful.
Iger says he will leave at the end of 2021. As he will be only 68 years old, the board may convince him to stay on. It would be extremely hard to replace him.
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