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Disney+: Disney's Pivot Into Tech

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Disney+

The Walt Disney Company (DIS - Free Report) was founded in 1923 by Walt and Roy Disney as a cartoon company. The business has expanded aggressively since their inception and owns the largest chain of theme parks in the world, produces some of the biggest blockbusters, has become one the largest media companies on earth, and is now converting itself into a tech company with Disney Plus (Disney+). Disney+ is anticipated to be the next “must have” subscription streaming service. This platform is going to be launched later this year and details about this launch are expected today.

Disney’s most recent acquisition of 21st Century Fox, which closed for $71.3 billion (outbidding Comcast) on March 20th, has given them enough content to launch their own streaming service. This acquisition included Twentieth Century Fox Film Corporation (with a lease on its studio lot in Century City), Fox Television Group, Fox Networks Group International, as well as giving DIS majority stake in Hulu (30% DIS already held and 30% from Fox). Disney already owns Pixar Animation, Marvel Studios, and Lucasfilm which combined cost them $15.6 billion in cash and stock.

Now Disney and its upcoming launch of Disney+ are going to be competing in what is becoming a very saturated space. They will be going head-to-head with streaming powerhouses like Netflix (NFLX - Free Report) , Amazon Prime Video (AMZN - Free Report) , HBO, and now Apple (AAPL - Free Report) , which is launching their own streaming platform. Disney+ hopes that their service will act as a supplemental addition to subscribers’ portfolio of streaming services.

The subscription streaming category is currently being controlled by Netflix, who has been the leader since their streaming service was introduced over a decade ago. Netflix’s focus on quality original and exclusive content is how they have retained and expanded their customer base. They released almost 1,500 hours of original content in 2018 and had exclusive rights to more than 850 titles (according to quartz), which no one can pretend to have enough to watch. The seemingly endless amount of content continues to be released, keeping their subscribers prepetually entertained.

Disney is going to have to spend hundreds of millions on developing and launching a streaming service to compete in this industry. On top of that Disney will have to sacrifice about $150 million a year in royalties paid out by Netflix, according to The Wall Street Journal. The company currently has over $4 billion in cash and cash equivalents as well as posting over $7 billion in free-cash-flow giving them the flexibility they need to invest a sufficient amount into Disney+. This will be a huge undertaking by Disney and is going restructure the business and its revenue drivers.

Disney Financial Overview

The Walt Disney Company has posted fairly consistent top and bottom-line growth figures as well as solid margins. Currently 44% of DIS’s revenue is being driven by their theme parks & consumer products and 38% of the revenue coming their media networks. The recent Fox merger along with the launch of Disney+ is going to shake up these revenue drivers putting more emphasis on media content.

 

DIS has had a strong 52 weeks, outpacing the S&P 500 by 7%. Above is a 5 year chart reflecting DIS’s P/E (blue) relative to the broader media market (red). As you can see the stock is trading at a relative cheap multiple for this industry. There is still a lot of uncertainty about the future of this business and the implication of both the recent merger with Fox and Disney+. Tune in today to Disney’s Investor webcast to learn more about Disney+ and other important DIS topics. DIS – Zacks Rank #3 (Hold).

 

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