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The Magic Kingdom Is the Streaming Industry’s Micro-Bubble Winner

New Constructs

New Constructs
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This week, we focus on a firm that is well-positioned to thrive in the increasingly competitive video streaming market. Though it is currently rated Unattractive in our model, largely due to transitory COVID-19-related disruptions, micro-bubble winner The Walt Disney Company (DIS: $189/share) is this week’s Long Idea, which we pair with Neutral-rated micro-bubble loser Netflix Inc. (NFLX: $535/share).  

We first made Disney a Long Idea in January 2017 and a Micro-Bubble winner in August 2018. While the stock has underperformed the S&P 500 by 3% since our first article, it is up 65% (vs. S&P +38%) since our August 2018 report. Today, Disney’s stock remains undervalued as its business recovers from the pandemic and enters the next phase of growth. DIS continues to present quality risk/reward given Disney’s:

  • unmatched ability to create and monetize original content
  • growth in streaming is outpacing expectations
  • ability to generate profit if streaming margins approach zero
  • live content is a key differentiator
  • parks and cruises will likely rebound beyond pre-covid levels
  • cheap valuation and large upside for DIS if profits reach 2018 levels

Another Door Into the Magic Kingdom

Unlike Netflix, Disney’s profitability is not dependent on streaming because the firm is, rather uniquely, positioned to monetize content across many business segments. While the firm believes its streaming business will be profitable by 2024, profits are not the point for Disney’s streaming business. We think of Disney’s streaming offerings as another entry point into the magic kingdom’s content monetization platform.

Figure 1 shows subscription fees from streaming services account for only 12% of the firm’s revenue in 2020.

Figure 1: Disney’s Revenue by Segment in Fiscal 2020

Sources: New Constructs, LLC and company filings.

Disney Is Growing Market Share While Netflix Isn’t

At the end of fiscal 1Q21, Disney had more than 146 million subscribers across its Disney+, Hulu, and ESPN+ platforms. In just 16 months from its launch date, Disney+ reached 100 million subscribers, a feat that took Netflix 10 years to accomplish. For reference, Netflix currently has 204 million paid subscribers, or just 40% more than Disney’s subscribers across all platforms. Rapid user growth means Disney has improved its share of global online video subscriptions from 7% in calendar 2019 to 13% in calendar 2020.

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This article originally published on March 24, 2021.

Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.

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[1]Monthly cost of streaming revenue per subscriber for Disney and Netflix is calculated as the total cost of revenue in the reported period divided by the number of months in the reported period and the average number of subscribers in the reported period. Disney’s cost of streaming revenue equals the firm’s programming and production costs and other operating expense from its filings. Netflix’s cost of streaming revenue is taken from its filings’ cost of revenue, which includes “expenses associated with the acquisition, licensing and production of content…”

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Disclosure: New Constructs

Disclosure: David Trainer, Kyle Guske II, Sam McBride, Matt Shuler, Alex Sword, and Andrew Gallagher receive no compensation to write about any specific stock, style, or theme.

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