DIS - Disney

[wabuffo]

There's also reports in the media industry that Disney did some panic-buying back of their streaming rights on more titles than the original business plan in order to beef up Day 1 content.  Particularly, Marvel Comic Universe titles. 

 

This is a purely defensive move by Disney and it will cost them money.  I think they were getting $2-$3B in annual royalty revenue (not sure about these revenue numbers) with little opex from Netflix and other streaming services.  That is rapidly going to zero and they will have to make it up via subscriptions.  At $80 per year per subscriber, they will need 25m-37m subscribers just to recover the revenue

 

But their new annual opex will be significantly higher due to exclusive content creation (eg. Mandolorian) + technology/digital streaming costs.  They may end up in a good place -- but in the short term, this is profit-destructive (even at 5x their Day 1 signup numbers).  At 10m paying subscribers, they are incinerating money.

 

The streaming service business is not very profitable as many services basically give it away from a revenue perspective while scripted content creation costs for talent are going through the roof.

 

Good for the broadband internet providers, though  8)

 

wabuffo

[TorontoRaptorsFan]

10M subs already!

 

Yes - but how many subs after the free week is over and every-one has binged watched all of the StarWars/MCU movies.  ;)

 

wabuffo

 

They're only releasing episodes from their original programs weekly. The first episode of the Mandolorian was done extremely well. No expense was spared in the special effects of the show and the ending of the episode had a very nice cliffhanger. The second episode is coming out on friday. At the conclusion of the series either a new Star Wars or Marvel original series will begin. A lot of the Marvel, Star Wars, and Pixar movies/shows are being released in 4K and Dolby Atmos.

[Gregmal]

10M subs already!

 

Yes - but how many subs after the free week is over and every-one has binged watched all of the StarWars/MCU movies.  ;)

 

wabuffo

 

They're only releasing episodes from their original programs weekly. The first episode of the Mandolorian was done extremely well. No expense was spared in the special effects of the show and the ending of the episode had a very nice cliffhanger. The second episode is coming out on friday. At the conclusion of the series either a new Star Wars or Marvel original series will begin. A lot of the Marvel, Star Wars, and Pixar movies/shows are being released in 4K and Dolby Atmos.

 

Hopefully someone figures out that the binge watch model ultimately sucks for the consumer. At least I feel it does, when it comes to ongoing series. Its bad enough with shit like HBO where you wait 18-36 months for a new season. But with Netflix, you legit watch the entire season in a couple days and then are often waiting even further. At the least, killing that, and doing the one episode per week would be great. Or taking it a step further and not releasing the first 12 episodes until 18 or so are finished. This way, you can finish up season 2 while one is running, and then shoot season 3 in the lead up to season 2. That would significantly knock the lag time down and keep viewers plugged in. Yea, yea, I know its added cost...but with certain shows, there isn't exactly uncertainty regarding whether or not it will get renewed.

[wabuffo]

A lot of the Marvel, Star Wars, and Pixar movies/shows are being released in 4K and Dolby Atmos.

 

which appeals to the nerdy 1% of the 10m subs who actually care about this stuff.

 

I thought the Mandalorian pilot was meh... like the Star Wars recent vintage of movies - it looks like it was written (and rewritten) by committee.  The best stuff is not coming to Disney+, the rest of Disney is going to see to that.  This is the problem with successful businesses - they can't bring themselves to fully commit to do what it takes to make their new business successful if it means destroying/cannibalizing their legacy businesses.

 

wabuffo

(one of 1% videophile nerds)

[Castanza]

10M subs already!

 

Yes - but how many subs after the free week is over and every-one has binged watched all of the StarWars/MCU movies.  ;)

 

wabuffo

 

They're only releasing episodes from their original programs weekly. The first episode of the Mandolorian was done extremely well. No expense was spared in the special effects of the show and the ending of the episode had a very nice cliffhanger. The second episode is coming out on friday. At the conclusion of the series either a new Star Wars or Marvel original series will begin. A lot of the Marvel, Star Wars, and Pixar movies/shows are being released in 4K and Dolby Atmos.

 

Hopefully someone figures out that the binge watch model ultimately sucks for the consumer. At least I feel it does, when it comes to ongoing series. Its bad enough with shit like HBO where you wait 18-36 months for a new season. But with Netflix, you legit watch the entire season in a couple days and then are often waiting even further. At the least, killing that, and doing the one episode per week would be great. Or taking it a step further and not releasing the first 12 episodes until 18 or so are finished. This way, you can finish up season 2 while one is running, and then shoot season 3 in the lead up to season 2. That would significantly knock the lag time down and keep viewers plugged in. Yea, yea, I know its added cost...but with certain shows, there isn't exactly uncertainty regarding whether or not it will get renewed.

 

From a consumer perspective who would want that though? It's like Pandora's box. With today's mindset of gotta have it now one would think it's difficult to keep subscribers if you shift your platform to the 1 episode a week model if the competition manages to pump out binge worthy content at a faster rate. The streaming wars is beginning to look like a race off a cliff. At what point will plethora of original content not keep the consumers satisfied enough to continue a subscription? Personally, I think the platforms that don't offer some form of live tv alongside original content will eventually begin to see their subscription rates dwindle if sub prices continue to rise. The amount of big names Netflix has been using can't be cheap. 

 

I've used Hulu Live for a year or so and have enjoyed the platform. It has some decent original content but also has live TV which satiates you when you're waiting for the next season of whatever it is you were watching. I do think the original content on Netflix is generally better.

[Gregmal]

There should be a middle ground between gotta have it now and wait 2 years for a new season. Sure theres people with nothing to do, and gotta have it now means they blow through House of Cards new season in one day. Then theyre stuck waiting years for the next one and probably forget what ever happened the previous season by the time the new one rolls around. Get on a schedule were you are releasing new content every 6-12 months(in terms of shows), while also dragging along viewers by forcing them to be disciplined. I know I kept Showtime for an extra few months because of a couple series they had going that only did one episode a week. Same with HBO recently, until Righteous Gemstones and Succession finished up. If those shows come back in 6 months, vs 12-18, I probably dont cancel and if I do, the in between lag time is less. IE company has me as a monthly paying sub for longer.

 

People will literally just watch and then cancel unless something new comes along. Thats why live sports and news is going to be crucial. Its silly, and part of the reason I am short NFLX, to assume people will just put up with same old, same old, forever, WHILE being OK with price hikes. I mean the whole basis of the streaming revolution is because people are friggin cheap and dont want to pay $70 a month for shit they dont find interesting.

 

 

[glorysk87]

10m subscribers on the first day. That's incredible. Some analysts thought it would take Disney a year to reach 10 million subscribers.

 

It's really not day 1 though. They've been running the marketing machine at full tilt for weeks now, and pre-orders have also been open for months.

[glorysk87]

I sold half my position today. Even with extremely generous assumptions, the best case scenario is that the stock offers ~10% annual return from here. In a best case scenario. Not great risk/reward in my view.

[Liberty]

 

40-min interview with Kevin Mayer, who oversees Disney+

[Spekulatius]

I wonder if Mr market is waking up to the fact that this is a company with challenging looking financials trading for $140 and earning $5.3 this year and. It much more next year. I guess it’s cheap relative to Netflix, but it’s quite expensive relative to its own history. Disney’s cable channels are struggling mightily and the ARPU of their streaming accounts is way lower than for cable.

 

I do get the narrative about the flywheel of Disney brands, entertainment properties and DTC, but it’s going to take years until they can lap the effects of cable cutting.

[bizaro86]

I think its interesting that there were no questions on the call about cord cutting and espn sub losses. A year or two ago that's all anyone asked about, with maybe a parks and a studio question thrown in.

 

Now all the questions were about disney plus with a parks and studio question thrown in.

 

I was hoping for a big bump on disney plus numbers which I expected to be good, and then sell and/or sell in the money calls. I think I will still sell the calls.

 

I think DIS is one of the all time great businesses. I just dropped a few thousand dollars at the parks in California, and every individual purchase (tickets, maxpass, food, snacks, character breakfast) felt like great value. But the total bill was significant. I actually think they could take significant price in the parks business. I've gone to all the bigger west coast theme parks with my kids in the last 2 years - DIS is the most expensive but it's so much better I think the value is there.

 

But the headwinds for the next year are huge. The theatrical business will make half as much money if they're lucky, 2 parks are shut down, and ESPN will make less money on lower subscriptions/higher rights payments. Plus DTC spending - both on content (3x marvel series) and promotion (takes a lot of $6 arpu months to pay for a super bowl ad).

 

Given the multiple it seems likely that there will be a better chance to re-enter at a lower price in the next 24 months. I have a hard time owning things that are mostly trading on story.

[Liberty]

Bob Iger is out:

 

https://www.cnbc.com/2020/02/25/disney-names-bob-chapek-next-ceo.html

[Pauly]

Wow, didn't see that coming. Wonder if it's health related?

 

If it was conduct based I assume he wouldn't be staying on as chairman.

 

 

[Liberty]

Wow, didn't see that coming. Wonder if it's health related?

 

If it was conduct based I assume he wouldn't be staying on as chairman.

 

That was my first thought.. Either he's ill, or he's running for president ¯\_(ツ)_/¯

[CorpRaider]

Those were my thoughts too.  One other possibility (probably low) but he said he wants to focus 100% on content...I wonder if the Star Wars film is really in the ditch and he wants to try and fix that.

[Spekulatius]

Wow, didn't see that coming. Wonder if it's health related?

 

If it was conduct based I assume he wouldn't be staying on as chairman.

 

I think health related is the most likely possibility. I first thought they the board may have canned him, but I think this is unlikely, but who knows? In any case, Iger has masterfully created a narrative for DIS that has helped it trade at a premium valuation roughly twice as high than peers. I think some of this value premium may deflate.

 

It’s partly justified by having better assets, but I think the narrative created by Iger was a big part of it.

[dwy000]

I dont know.  He wanted to leave a couple of years ago (according to his book) but got forced to stay to close the Fox acquisition. So it makes sense he wants out now that it's all going gangbusters and Fox has been swallowed.

 

In addition, it's tough to transition the closer you get to your end date. The last year would be so destructive with infighting and he would be a lame duck for internal politics. In this way he gets to announce and transition with less distraction for the company.

 

Could be health ( or something else a la Les Moonves) but hard to know. Either way, his legend has been cemented right next to Walt.

[bizaro86]

I think he knows the next couple of results are going to be bad and is getting out on top.

 

Two parks closed for coronavirus, Mulan opening rescheduled (from an already much weaker than 2019 film slate). And potential bad news (expenses ++) from the upcoming NFL renegotiation.

 

I sold covered calls at $130 (thanks to Gregmal for the idea!) on my whole position in the mid $140s. Now I need to decide whether to roll them lower or just let it ride.

[Spekulatius]

I think he knows the next couple of results are going to be bad and is getting out on top.

 

Two parks closed for coronavirus, Mulan opening rescheduled (from an already much weaker than 2019 film slate). And potential bad news (expenses ++) from the upcoming NFL renegotiation.

 

I sold covered calls at $130 (thanks to Gregmal for the idea!) on my whole position in the mid $140s. Now I need to decide whether to roll them lower or just let it ride.

 

Yes, that’s also a possibility. The earnings estimate a while ago were ~$5.5/share, so if we get a significant earnings warning and get $4.5/share, how do we justify a one $125 share price, when competitors trade at 8x earnings and 10%+ FCF yields? Even discounting the difference in quality, that a bridge or two too far imo. I can easily see DIS hit $100/ share and it still wouldn’t look cheap.

[bizaro86]

I think he knows the next couple of results are going to be bad and is getting out on top.

 

Two parks closed for coronavirus, Mulan opening rescheduled (from an already much weaker than 2019 film slate). And potential bad news (expenses ++) from the upcoming NFL renegotiation.

 

I sold covered calls at $130 (thanks to Gregmal for the idea!) on my whole position in the mid $140s. Now I need to decide whether to roll them lower or just let it ride.

 

Yes, that’s also a possibility. The earnings estimate a while ago were ~$5.5/share, so if we get a significant earnings warning and get $4.5/share, how do we justify a one $125 share price, when competitors trade at 8x earnings and 10%+ FCF yields? Even discounting the difference in quality, that a bridge or two too far imo. I can easily see DIS hit $100/ share and it still wouldn’t look cheap.

 

I'd be a pretty heavy buyer at $100. I think the studio business and D+ are better than their competitors businesses, and the parks are basically unequaled.

 

At $100 the market cap would be $195B, add $48B debt and deduct $7B cash for an EV of $236B.

 

The parks did $7 B in op income in the TTM. It's been growing 11% pretty consistently, so I dont think 20x is out of line. So that leaves $96 B for the rest of the business. There's ~$9B of ex-parks EBITDA. That seems pretty cheap for their studio and networks to me. Their competitors are cheaper than that even now, but I'd rather own the Disney studio than any of the other ones.

 

 

[mcliu]

Agreed. Disney has a lot of irreplaceable unique assets + direct & global distribution in this new streaming age. Worth the premium.

[bizaro86]

Agreed. Disney has a lot of irreplaceable unique assets + direct & global distribution in this new streaming age. Worth the premium.

 

The biggest risk here is that the income from networks (==ESPN) starts to fall off. They've been able to overcome customer losses with price increases so far. But the NFL comes up soon, and their cost for Monday Night Football will go way up (which they need to keep, imo). That will put more pressure on ESPN income.

 

The narrative here has changed - a couple of years ago ESPN sub losses was all anyone cared about, and they were languishing at/below $100. That was a great buying opportunity (and I bought lots). Nobody seems to be talking about that anymore, and the long term issue is still the same imo. D+/Hulu/ESPN+ might eventually get there, but it'll be a long road. Plus you have recession/coronavirus risk for the parks business.

 

I'm long term extremely excited about this company, but I think the short term is likely to be a disappointment. I sold calls against my full position (which are now out of the money) and I still might roll them lower/longer. If this gets to $100-$105 or so I'd buy another big tranche, but at $126 I think its more like a hold.

[CorpRaider]

I am waiting/hoping it gets punished a lot as the financials look horrible over the next few years.

[nspo]

I think he knows the next couple of results are going to be bad and is getting out on top.

 

Two parks closed for coronavirus, Mulan opening rescheduled (from an already much weaker than 2019 film slate). And potential bad news (expenses ++) from the upcoming NFL renegotiation.

 

I sold covered calls at $130 (thanks to Gregmal for the idea!) on my whole position in the mid $140s. Now I need to decide whether to roll them lower or just let it ride.

 

+1

 

Yes, that’s also a possibility. The earnings estimate a while ago were ~$5.5/share, so if we get a significant earnings warning and get $4.5/share, how do we justify a one $125 share price, when competitors trade at 8x earnings and 10%+ FCF yields? Even discounting the difference in quality, that a bridge or two too far imo. I can easily see DIS hit $100/ share and it still wouldn’t look cheap.

 

I'd be a pretty heavy buyer at $100. I think the studio business and D+ are better than their competitors businesses, and the parks are basically unequaled.

 

At $100 the market cap would be $195B, add $48B debt and deduct $7B cash for an EV of $236B.

 

The parks did $7 B in op income in the TTM. It's been growing 11% pretty consistently, so I dont think 20x is out of line. So that leaves $96 B for the rest of the business. There's ~$9B of ex-parks EBITDA. That seems pretty cheap for their studio and networks to me. Their competitors are cheaper than that even now, but I'd rather own the Disney studio than any of the other ones.

[Spekulatius]

I am waiting/hoping it gets punished a lot as the financials look horrible over the next few years.

 

Same here. As it stands currently, I prefer CMCSA because it’s much lower valued and I see it only in part justified by DIS better asset quality. Anyways, it will be interesting how it goes with DIS new CEO. We know the spiel - reset expectations, write off a couple of assets that aren’t doing well and reset the bar so it’s easier to jump over.