Walt Disney (DIS) will host a highly-anticipated investor event on Thursday that will be focused on its new Subscription Video On Demand (SVOD) streaming service, Disney+. The service is expected to launch by year-end and represents a massive pivot for the House of Mouse into the direct-to-consumer (DTC) space.
Disney is expected to be somewhat forthcoming with respect to its projections for the service. The stock broke out to a four-month high yesterday amid continued positive analyst commentary heading into the event. Cowen upgraded the stock to Outperform yesterday while BMO upgraded the stock to Outperform this morning. Last week, Rosenblatt resumed coverage of Disney with a Buy rating and $150 price target. The firm assumed an October 1 launch and $6.99/month price for Disney+, modeling 15 million subs by 2021.
Acquiring Pixar, Marvel Studios, and Lucasfilm over the years positioned Bob Iger's Disney as by far the leader in coveted content in Hollywood. The dominance of Disney properties at the box office cannot be overstated. Nine of the ten largest opening weekends in US box office history now belong to Disney.
As a result, the DTC offering is very likely to garner a massive subscriber base. Disney+ will consist of family-focused content that will feature more (exclusive) content as Disney's current licensing deals wear off over time. Through the acquisition of Fox assets, Disney now owns a majority of leading SVOD service Hulu as well. The company will have tons of optionality to drive growth among its DTC services.
In February, Disney said that driving the DTC business was its number one priority. After launching last April, ESPN's streaming service ESPN+ reached 2 million subscribers, doubling in five months as the company started featuring UFC events on the platform.
With a $210 bln valuation, Disney trades at ~12x EV/EBITDA. In what seems like a premium that is justified, the average media company trades at closer to 9x. That said, the company's integration of some $70 bln in non-core Fox assets is just getting underway.
Investments in its DTC offerings carry risk (additional costs while forgoing high-margin licensing revenue) and may lower earnings estimates near-term, but it seems like the right long-term strategy in a world where Netflix (NFLX), YouTube (GOOG/L), and Facebook (FB) have disrupted traditional media models. Notably, license agreements for high-quality content helped to fuel the growth of Netflix. Importantly, Disney will own and control all of its own content over time, unlike Netflix.
Disney's stock went on a massive run after breaking out in 2012 as the film studio flourished while ESPN reigned as the crown jewel of all cable assets. However, the proliferation of cord-cutting meant that investor sentiment later soured as ESPN faced headwinds in the form of subscriber losses. As a result, the stock has traded in a fairly narrow range between $90-120 over the last four years despite record-breaking box office results.
After going on the offensive with ESPN+ last year, Disney will tomorrow mark the beginning of a new era for its business, one in which the company holds more control over its renowned intellectual property. Success with Disney+ will create more recurring revenue and increase the stickiness of its complementary businesses. Disney expects that to lead investors to pay a higher multiple of earnings over time.