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Value Investor Daily #66
Disney Turnaround: Streaming Turns Profitable, Sees 10%+ EPS Growth in 2026-2027
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Disney (DIS) Turnaround: Streaming Turns Profitable, Company Sees 10%+ EPS Growth in 2026-2027
Disney announced earnings last week on November 14th, beating slightly on the top and bottom lines. The company guided for “Double-digit adjusted EPS growth” in 2026 and 2027.
CFO Hugh Johnston went on CNBC and said:
“I think the fact that we’ve had such a strong ‘24 overall has been an important part of the guidance that we’re giving. If you think of the big initiatives that we’ve invested in—putting creativity back at the center of the company—and the couple of billion-dollar movies and all the [Emmy-nominated] shows that have driven terrific creative results out of the company. Then, on top of that, we said we wanted to improve streaming profitability, and we’re clearly doing that in a substantive way. And then we’re investing in the Parks because we have such great returns in that business, whether it’s theme parks, cruises, or even consumer products. So, if you put all of those pieces together, I think ‘24 in many ways was the pivot point for The Walt Disney Company, and we have enough confidence now in the results that we’re seeing to say we really can guide for the next couple of years.”
So, in his eyes, the business is in a very strong position.
The most interesting part of the report was the update on the streaming business, which may have turned the corner. For the first time, it delivered $253 million of operating profit. Reported losses had previously been as high as $1.4 billion in Q4 2022.
What’s the streaming business worth? What’s the potential? Let’s take a look.
The company ended the quarter with 122 million Disney+ subscribers and 52 million Hulu subscribers.
It also had 35 million Hotstar subscribers. It recently partnered with India’s Reliance Industries to form a new joint venture, JioStar, that holds the Indian streaming business (along with 100 Indian TV channels and another streaming service, JioCinema). Disney retains 36%.
Assigning 12 million subscribers from the JioStar stake, that’s 186 million streaming subscribers. Netflix (NFLX) has 282 million global subscribers.
Let’s compare the Disney streaming business with Netflix.
Netflix | Disney Streaming Segment | |
|---|---|---|
Subscribers | 282 million | 186 million |
Revenue | $37.5 billion | $22.7 billion |
Quarterly Operating Income | $2.9 billion | $253 million |
TTM Operating Income | $9.6 billion | $143 million |
Annual revenue per subscriber | $132 | $122 |
Market cap | $372.4 billion | $203.5 billion |
Market cap per subscriber | $1,320 | $1,094 |
10 years ago, Netflix had revenue of $5.5 billion and $402 million of operating income. Its EV/EBITDA at the time was as high as 160X. It’s down to 37X today.
Netflix is up 1600% since then.
SeekingAlpha
If we apply a run rate of $1 billion in operating profits to the Disney streaming division versus the current enterprise value of $251 billion, we get an EV/EBITDA of 251X today. Is the story repeating?
Disney’s costs in the division have been flat to down the last two years:
Quarter Total Entertainment DTC Operating Expenses
Q1 2023 ($4,623)
Q2 2023 ($4,530)
Q3 2023 ($4,490)
Q4 2023 ($4,216)
Q1 2024 ($4,493)
Q2 2024 ($4,414)
Q3 2024 ($4,542)
Q4 2024 ($4,299)
Do you think Disney can continue to control costs and continue to grow margins?
Can they add another $15 billion of revenue and 96 million subscribers to reach Netflix’s size?
Here’s what CEO Robert Iger had to say about it in the earnings call:
“As we look to grow our streaming business, we believe there will be opportunities and even a need for us to do some selective investing outside the United States, notably in EMEA and in APAC. We've slowed down our investment in those markets. And in fact, we're being careful about our overall investment until we get the technology right, until we improve the technology because clearly, if we can use technology to reduce churn, which we're already doing, then in reality, what we're doing is we're increasing return our investment in content.
And we don't – so we don't want to spend on the content side until we're confident that we can get the necessary returns on those investments. But we know as we look to grow our streaming business that prioritizing markets outside the United States with specific content in those markets will be part of that strategy. I don't think you should consider those investments to be enormous in nature by any stretch of the imagination because we know that we're making content that has global application. If you look at just the movies that I mentioned as for instance, that work not in all markets, but in most markets. But we don't have to spend as much as some of our competitors. And as there's movies – it's not just the franchise value. As they become more successful, obviously, they drive more value as well.”
From his comments, we can see Disney’s streaming ambitions are focused on reducing churn with technology before heavily investing in subscriber growth. They’re looking to capitalize on their unparalleled ability to produce blockbuster hits, using these global box office successes to attract and retain an international subscriber base.
So they’re not going to add 96 million more subscribers overnight, but what if it took 5-10 years?
If Netflix is worth $1320 per subscriber, is Disney’s 186 million subscriber streaming business worth $245 billion today alone?
Definitely not because the margins are not there yet, but it clearly has the potential to grow into something Wall Street would be forced to re-price.
Many streamers have come and gone (remember Quibi?). Many future ones will crash and burn. But Disney seems in it for the long haul. Given Disney’s rapid rise to become Netlix’s only serious competitor within just five years of launching, the streaming division seems undervalued today.
Of course, Disney’s other divisions also generate an additional $68 billion in revenue, $12.1 billion in operating profit, and $8.8 billion in cash flow.
There’s basically an embedded long-term option on a scaled-up streaming venture here, which is already the third biggest behind Netflix and Amazon’s (AMZN) Prime Video, and now it’s profitable, too.
What do you think? Does Disney have a streaming giant Wall Street is sleeping on? Or is it going to get obliterated by Netflix and take the stock down with it?
Thank you for reading today!
Happy Investing,
Value Investor Daily
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