Shareholders of Walt Disney Co. (DIS, Financial) responded very positively to last month's announcement that the media giant was reorganizing its businesses to focus more on its streaming service, Disney+. This is unsurprising - Disney possesses a huge library of content, which includes some of the most valuable intellectual property, like the Star Wars and Marvel franchises, as well as a back catalog of animated films that are beloved by billions of people. Here's how this announcement might change investor sentiment toward the company.
A clear advantage in the streaming wars
Disney+ couldn't have come at a better time. In a year when cinemas have effectively stopped functioning altogether, Disney has a platform on which it can release its new content directly to a captive audience in the comfort of their own home - earlier this year, it released its live-action remake of the film "Mulan" for a cost of $30.
With such an impressive arsenal, the only surprise is how long it took for Disney to unveil the streaming service. This reorganization was inevitable, but has clearly been hastened by the impact of the coronavirus on theme park revenue. The service has been operational for about a year, and in that time has attracted 100 million paying users.
So has anything changed for Disney since the announcement? Well, sort of. While everyone knew that Disney was going to change in this way, the important thing is how the company is perceived. Streaming companies are valued at much higher multiples than theme park companies and film studios. For instance, Netflix (NFLX, Financial) currently trades at a price-earnings ratio of 79, all while incinerating capital - in 2019 alone, it had a free cash flow of -$3.14 billion. By contrast, Disney has traded at a price-earnings ratio of around 18 over the last several years and generated $1.1 billion in free cash flow in 2019 (a relatively poor year by this metric).
What's more, Netflix has a comparable market capitalization to Disney - $214 billion compared to $242 billion. Bear in mind that Netflix doesn't have anywhere near the kind of IP that Disney has, does not have a sprawling theme park empire and is not free cash flow-generative. If investors begin to apply the same standards to Disney as they do to companies like Netflix, shareholders of the former could be in for a strong next few years.
Disclosure: The author owns no stocks mentioned.
Read more here:
- Seth Klarman Explains Why Holding Cash Is Good
- The Value Investor's Handbook: Are Index Funds in an Asset Bubble?
- Charlie Munger: Be Rational, Not Brilliant
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
