Tudor Investment Corp, managed by billionaire investor Paul Tudor Jones (Trades, Portfolio), is known for successfully identifying macro themes and investing in companies that would benefit from the expected changes in operating conditions. Although the hedge fund did not meet performance expectations in the recent past, Tudor has a celebrated history that spans over four decades in which he has beaten the market more often than not.
The third-quarter 13-F filing of Tudor Investment reveals the fund has scooped up 44,160 shares in the Walt Disney Company (DIS, Financial). The entertainment giant took a few punches in the gut earlier this year as theme parks around the world were shut down, theatres were forced to remain closed and the CDC issued a no-sail order for cruise ships in the U.S. Earlier this week, George Soros (Trades, Portfolio) revealed adding 150,000 Disney shares to his portfolio in the third quarter as well. The odds finally seem to be tilting in favor of the company.
Disney Plus is a game-changer
The video streaming platform was launched just over a year ago, but more than 73 million subscribers have already signed up for the service. In comparison, market leader Netflix Inc. (NFLX, Financial) has garnered over 200 million worldwide subscribers in more than a decade since it launched the platform. Disney, evidently, is growing at a much faster pace than its rivals and the company's brand name has a lot to do with this early success. Disney Plus is currently available in North America, Europe and a few Asian nations including India. On Nov. 17, the company launched the service in Latin America as well and pledged to produce original content to cater to this region. Soon, Disney+ will be available in every corner of the world, and subscriber numbers can be expected to hit new highs in the coming years.
The new-look Disney is laser-focused on growth
On Oct. 7, Third Point Capital founder and CEO Dan Loeb sent an open letter to Disney requesting the company to focus more on the direct-to-consumer model. The guru went on to suggest that Disney should ideally consider its streaming business as the #1 priority because of the massive leeway for growth available for over-the-top content streaming platforms.
On Oct. 12, the company announced a major reorganization in which Disney pledged to prioritize content streaming with immediate effect. Commenting on the new look of Disney, CEO Bob Chapek said:
"Given the incredible success of Disney+ and our plans to accelerate our direct-to-consumer business, we are strategically positioning our Company to more effectively support our growth strategy and increase shareholder value. Managing content creation distinct from distribution will allow us to be more effective and nimble in making the content consumers want most, delivered in the way they prefer to consume it. Our creative teams will concentrate on what they do best—making world-class, franchise-based content—while our newly centralized global distribution team will focus on delivering and monetizing that content in the most optimal way across all platforms, including Disney+, Hulu, ESPN+, and the coming Star international streaming service."
One of the biggest criticisms Disney attracted over the last few years was its lack of focus on high-growth business sectors. However, I think the new-look Disney addresses these concerns as the company is now gearing up to take on the lucrative video streaming industry that is expected to grow in double-digits over the next few years.
Source: Statista
While the company continues to reel from the impact of the recession and the global lockdown in 2020, Disney has taken a step forward in aligning its business model with the developing trends in the global entertainment industry, which is good news for long-term oriented investors.
The headwinds are slowly but surely disappearing
If history teaches one lesson about pandemics, it's that these outbreaks will come to an end eventually. While there is no way to know when that would happen this time around, both Moderna, Inc. (MRNA) and Pfizer Inc. (PFE) have delivered breakthrough data in the last couple of weeks that suggest a vaccine might be closer than many believe. With or without a vaccine, headwinds that challenged Disney seem to be losing their grip on the company's financial performance, in my view.
First, the CDC issued a Framework for Conditional Sailing Order on Oct. 30, suggesting Disney and other leading players in this industry will soon be allowed to onboard passengers to cruise ships once again. This business segment accounts for a very small percentage of total revenue, but the expected improvement in operating conditions can be expected to lift investor sentiment meaningfully. Commenting on the outlook for the cruise business segment in the fiscal fourth-quarter earnings call on Nov. 12, Disney CEO Bob Chapek said:
"I guess the best news out of all of it is that we now do see some light at the end of the tunnel. I think we have an opportunity to create sort of a Disney bubble, if you want, on each of our cruise ships. And demand is very, very, strong for our cruise ships. We're seeing extremely strong demand in the back half of 2021, and all of 2022 in terms of bookings."
Second, theme parks around the world are once again accepting parkgoers after remaining closed for many months to comply with directives issued by health authorities. According to an update on the company website, all four Walt Disney World theme parks are now open, though Blizzard Beach water park and Typhoon Lagoon water park remain closed pending government approval in respective jurisdictions. The company plans to reopen these locations by March 2021. Disney has invested millions of dollars to install physical barriers, signage, cashless transaction options and mobile ordering facilities to increase the safety of parkgoers. There are restrictions on the admissible capacity at any point during the day, but these are likely to be lifted in the next year if the prevailing health risks subside. In any case, the company is slowly getting back on its feet concerning the theme park segment as well, which was the top contributor to total revenue in the last year.
Third, the company has found a workaround to recover some of the expected losses resulting from the closure of movie theatres. Disney suffered a massive blow from the closure of movie theatres as planned new releases had to be postponed leading to loss of expected revenue. However, Mulan, one of the most anticipated movies this year, was premiered exclusively on Disney+ for a one-time fee of $29.99. According to MediaPost, the company earned in excess of $33 million from this very first movie that debuted on the streaming platform. While many critics consider Mulan to be a flop, Disney considers this to be a nice learning curve and executives are currently working on developing a pricing mechanism that would help Disney+ profitably launch movies online.
Takeaway
I think Disney is stepping in the right direction by focusing on its direct-to-consumer business. The major industries the company operates in are also flashing positive signs about the future. Disney stock has traded sideways so far this year, and the recovery from the lows reported in March has been stellar. The improving market sentiment played a major role in this recovery more than numbers did, but the stock is likely to get a boost from strong numbers in the year ahead. The changes to the business model of the company suggest Disney is not yet done in its mission to dominate the entertainment industry, and the stock is poised to deliver attractive returns in the long run both through dividends and capital gains. It seems that Tudor Jones and several other investors agree.
Disclosure: The author owns shares in Disney.
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