We initiated a position in The Walt Disney Company (“Disney”) in Q2 2020 and it has been one of our largest profit-generators since. Our investment was predicated on the value creation opportunity in DTC streaming, and our belief that Disney’s superior content and IP gave it the opportunity to build a subscription-led business that would eclipse the scale of its TV and box office businesses. We also believed investors would ascribe a higher multiple to
those recurring subscription revenues. We encouraged CEO Bob Chapek to secure Disney’s future by investing more aggressively and implementing bold actions (including a permanent dividend cut) to capitalize on the full potential of Disney+.
The optimistic view of Disney’s streaming prospects has proven correct so far: less than two years after the launch of Disney+, streaming now generates over $15 billion in annual revenue from a base of 159 million subscribers (104 million from Disney+ alone). The market has rewarded this aggressive digital transformation, as evidenced by the 70% appreciation in the stock price since May 2020.
Disney has taken several important steps to accelerate the streaming transition since we initiated our position. At its December 2020 investor event, Disney doubled its medium-term Disney+ content investment relative to prior guidance (2024E spend of $8-9 billion versus prior 2024 guidance of $4 billion1) while retaining prior profitability guidance due to the platform’s early success. As a result, the cadence of new content availability on Disney+ will jump to 100 titles per annum (versus previous guidance of 60). Crucially, Disney is delivering enhanced value to Disney+ customers by incorporating greater flexibility into their tentpole film release strategy. Disney has experimented with both ‘Premier Access’ (releasing blockbusters like Black Widow under a “day-and-date” model with a surcharge) and exclusive marquee premieres on Disney+ at no added cost, notably Pixar’s “Luca” and “Soul”. They have also simplified the streaming value proposition in Europe and APAC by combining Star general entertainment content with the Disney+ library under a unified service which has been a tailwind to engagement.
While the progress thus far has been commendable, even more can be done to realize Disney’s full potential in streaming. In our view, the combined strength of Disney’s various sports, general entertainment, and blockbuster franchises remains unparalleled in the global media industry. We continue to believe that the best way to capitalize on this strength to maximize future earnings potential globally (both reach and pricing power) is by providing an all-you-can eat DTC offering on a single platform under the Disney+ brand, where all theatrical content is available day-and-date with no additional fee to subscribers.
Disney management deserves credit for leaning into the DTC transition during a very challenging operating environment. The COVID-19 pandemic caused unprecedented operational disruption to Disney’s parks and live sports businesses (Disney’s California theme parks, for example, were closed for over a year). The magnitude of this challenge cannot be overstated: in the year preceding COVID, parks accounted for over 1/3 of Disney’s operating profit. While the Delta variant’s recent rise highlights that the pandemic is far from over, it appears the parks may be set to ultimately emerge from this crisis even stronger than before. Domestic theme park demand has recovered to previous highs, while management has optimized pricing and fixed costs relative to 2019 levels. Consumer Products, another key segment, is thriving despite a shrunken physical footprint due to the success of digital-first IP like the Mandalorian’s “Baby Yoda.”
Over the past year, we have left our conversations with Mr. Chapek and CFO Christine McCarthy impressed by their relentless pursuit of long-term value creation for Disney and its shareholders. They have done what is right for consumers, even when it may be at odds with the legacy Hollywood ecosystem. The opportunity ahead remains immense: 1 billion global broadband-enabled homes, 4 billion mobile smartphone subscribers and, most importantly, at least 1 billion global Disney fans. A successful transition to a subscription-led DTC business model has consistently proven accretive to both long-term earnings and valuation multiples for the businesses we follow, with notable examples including Microsoft and Adobe (both saw forward P/E multiples triple between 2010 and 2020 with long term earnings expansion at a teens CAGR). Establishing a durable leadership position in the competitive global streaming market will require tough choices, aggressive investment, unwavering focus and consistent innovation. We are confident that management is up to the challenge and look forward to remaining partners along the way.