To achieve growth on the top line, The Walt Disney Co. (DIS, Financial) has spent nearly $100 billion in the last two decades buying up big brands like Pixar, Lucasfilm, 21st Century Fox and Marvel. So far, that has not gone the way it expected and despite legacy media channels ESPN and ABC still going strong with live sports and prime time programming, the company's profits have suffered considerably since the Covid-19 pandemic. That was a time when it should have taken market share.
With that in mind, Disney remains undervalued based on both the sheer amount of content it owns and brand recognition worldwide, both of which will continue to translate into higher revenue and profit.
The story behind the stock
One of the world's most famous and influential entertainment companies, the company was founded on Oct. 16, 1923 by Walt Disney and Roy O. Disney as the Disney Brothers Cartoon Studio. Its most iconic character, Mickey Mouse, made his public debut with the short film "Steamboat Willie” on Nov. 18, 1928, which is considered his official birthday. This film was one of the first synchronized sound cartoons, and its success was pivotal in establishing Disney in the brand it is today.
Disney is known for creating classic animated films like "Snow White and the Seven Dwarfs," "Cinderella" and "The Lion King." Over the years, it has acquired several major media companies, expanding its influence and content library. Some of these acquisitions include Pixar Animation Studios, Marvel Entertainment, Lucasfilm (the studio behind "Star Wars") and 21st Century Fox. It uses the brands' reach to sell its vast range of merchandise, from toys and clothing to home decor and school supplies.
Disney parks
A big part of Disney's brand are the theme parks and resorts it operates around the world, including Disneyland in California, Walt Disney World in Florida and international parks in Paris, Tokyo, Hong Kong and Shanghai.
The idea for Disneyland was conceived by Walt Disney during the 1930s and 1940s, when he would take his daughters to play at Griffith Park in Los Angeles. He envisioned a place where parents and children could have fun together. It would take more than two decades for Disneyland, the first-ever Disney theme park, to open its doors. On July 17, 1955, it did just that in Anaheim, California. When the company's visionary founder passed away in 1966, Disney World in Orlando was still five years from opening day. However, today the Magic Kingdom park is the most visited theme park in the world.
Collectively, Disney Parks have around 115 million annual visitors, down from the 2019 numbers, which were in the 155 million range, but up in each of the last two years. Out of those, the Magic Kingdom has more than 17 million visitors, who pay from $124 to $189 per visit, accounting for more than $2.1 billion in sales by itself. Magic Kingdom is the most expensive park, but Epcot, Disney Hollywood Studios and Animal Kingdom are all in the same range. Then add on hotels, food and beverage, park hopper passes and more and the numbers start really adding up. These figures paint a picture of the immense popularity and draw of Disney parks worldwide.
Digital streaming
Disney owns and operates a variety of television networks, including ABC, ESPN and the Disney Channel, as well as some of the most popular streaming services in the world, including Disney+, Hulu and ESPN+., Disney+ has nearly 160 million subscribers, Hulu has over 45 million subscribers and ESPN+ has over 22.3 million. Those are not small numbers, equating to around $2 billion a month.
The problem is expectations. People think that if Disney builds it, people will buy it, which is true to a large extent. However, every analyst seems to want these to be much higher, especially at the flagship Disney+. Admittedly, the compnay has set a target of reaching 230 million to 260 million Disney+ subscribers by 2024. This is a number that it may not reach, even with the majority of its subscribers coming from outside North America.
Apple acquisition rumors
An article on CNBC published earlier this month was titled: "Apple buying Disney would be a storybook ending for Iger, but fairy tales aren't real." It was written because of the numerous rumors and tweets that Apple (AAPL, Financial) buying Disney would be good for both companies.
Apple, under no circumstances, should buy Disney. Yes, the entertainment giant has had a profound impact on global culture. Its stories, characters and songs are known and loved by people of all ages around the world. Apple may be able to integrate its brand touch across Disney, but it would also alienate a lot of other media companies it works with on games and Apple TV. Also, it does not need Disney. Disney needs to stand on its own two feet and start to get back to a higher level of profitability.
Valuation breakdown
Disney’s situation can be summed up in the following statistical comparison.
Disney in 2004:
Revenue: $30 billion
Net income: $2.25 billion
Net profit margin: 7.4%
Market capitalization: $46 billion
Disney in 2023:
Revenue: $88 billion
Net income: $2.25 billion
Net profit margin: 2.6%
Market capitalization: $152 billion
Granted, the market is placing a higher value on Disney today despite the profitability being exactly the same as in 2004. For investors, Disney's earnings will not stay low for long with analysts estimating earnings per share to climb up to $7 by September 2026, equating to more than $12 billion in net income. That is about 12 times earnings based on today's price. Historically, Disney's average multiple is around 20 times earnings.
More importantly, Disney's top line will continue to grow, likely surpassing $100 billion in the next few years. And with an average multiple around 2.6 times sales, no matter how you look at it, the current market capitalization looks undervalued.
