Disney (DIS, Financial) is an entertainment conglomerate with revenues coming in from multiple segments, from their media network that includes marquee names such as ESPN, ABC and several Disney channels, from parks and resorts spread around the world, from consumer products, from studio entertainment units that produce and acquire live-action and animated motion pictures, from direct-to-video content, from musical recordings and live stage plays and from their interactive segment that creates and delivers branded entertainment and lifestyle content across media platforms.
A Stable Revenue Generation Machine
Though its entertainment-based revenue stream does not look that diversified with nearly 44% of their 2015 revenue coming in from media networks, Disney earns a significant portion from other segments as well, thus insulating its top line growth from being dependent on a single segment.
Disney has been extremely consistent with its revenue growth since the recession. The company has managed to grow its sales in the 4% to 9% range for the last six years - not a small achievement for a company of this size. With $155 billion in market capitalization at the time of writing, Disney’s stock is trading at 17.4 times earnings and 16 times forward earnings.
The biggest moat that Disney has is its investment of time and money in sports entertainment via their ESPN brand. With multiple channels reaching all over the world, ESPN already has a significant global presence and, as such, it will be hard to expect this unit to keep growing for ever. At the same time, it can be a huge cash flow machine for the company for decades.
Is Internet TV a Threat to Disney?
The future of the television has been increasingly under pressure due to the growth in on-demand video services provided over the internet. It is extremely possible in the future that all of us end up moving from cable-TV-based content consumption to internet-on-demand-based video consumption. YouTube has started broadcasting sports events live, Twitter has been signing deals to get NFL live streaming and the list goes on.
Though this threat of tech companies pushing into the live sports streaming market is real, it is still many years away from breaking the hold that TV has on the market. In anticipation, Disney has made a 33% investment in Hulu LLC, one of the top video-on-demand service providers in the United States. In addition, Disney also sells its programs to subscription video-on-demand (SVOD) services, such as Netflix (NFLX, Financial), Hulu and Amazon (AMZN, Financial). Fortunately, the company understands the need to have a presence in this new and growing area.
Unlike some companies that sit and watch their market erode in front of their eyes as other companies disrupt their core offerings - like Blackberry (BBRY, Financial) watched Apple (AAPL, Financial) pull the carpet out from under them - Disney, despite being one of the oldest companies in the world, understands the undercurrents of the industry and is already positioning itself in this new area. With sports fans present all over the world, sports programming requires constant negotiations and a keen eye for deal-making, an expertise that Disney has built over many years.
Nobody is going to stop Netflix from signing a deal to live-broadcast a soccer game in Europe or an NFL game in the United States. It is always a possibility. But from Disney’s point of view, they will be just another bidder in the auction, as the company already knows how to broadcast via the new delivery system and have Hulu in their books if the entire world decided to watch everything on the internet tomorrow.
As such, Disney has found a very effective way to manage its risks and there are not many companies that can break the moat of safety they have built around themselves.
Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
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