Disney May Have A Fundamental Problem

Summary:

• Potential entry barriers are being created for some of Disney’s popular content as more and more moving parts are introduced.
• Disney’s past popular content portfolio saw success through sporadic movie or content release forms.
• However, streaming platform users expect constant new releases, creating a problem for Disney’s existing content portfolio.

Introduction

Recently, Disney (NYSE:DIS) has been undergoing a political feud with Florida Governor Ron Desantis; however, disregarding a rather less predictable political drama, Disney, in my opinion, has a few fundamental risks associated with the company. For the past few years, Disney has been evolving its product portfolio to a direct-to-consumer subscription service through Disney Plus. With a strong content portfolio and loyal fans, Disney’s success in the space was predicted by many investors. However, today, the company’s subscriber base growth is not as explosive as it has been in the past. And, I believe the lackluster growth in Disney Plus and potentially its future movie line-ups may be a possibility for two major reasons. One, I believe Disney’s content is becoming more catered to a niche market. Two, Disney’s formidable success in all of its content in the past came from movies. In today’s streaming age, consumers seek new content as soon as weekly; thus, it is questionable if Disney can produce a plethora of content from its content portfolio without making the existing content catered toward a niche market audience. Therefore, due to these fundamental risks in Disney, despite the company’s likely strength in its traditional parks, I believe Disney is a sell until Disney proves that these risks can be overcome.

Niche Market

What do I mean by Disney’s content becoming a niche market? As the existing popular content series continue to progress in their storytelling, I believe a barrier to entry is being created for the general public as watching a new release requires a basic underlying understanding of the previous movie and so forth.

Using Marvel as an example, the Marvel cinematic universe is entering its fifth phase in 2023, which is creating a barrier to entry for the general public. For example, Marvel will be releasing Captain America: New World Order in May 2024, which is a sequel to previous Marvel movies including The Incredible Hulk, Captain America: The First Avenger, Captain America: The Winter Soldier, Captain America: Civil War, and The Falcon and The Winter Soldier. I think this starts to create a problem. Other than Marvel fans, the general public who is not familiar with all or most of the movies leading up to the upcoming Captain America move, may not have an excitement for the upcoming movie. For Ant-Man and the Wasp: Quantumania released in 2023, the story follows the quantum world that started in the Avengers: Endgame. As a result, the Box Office for the movie came in at a lackluster level of about $473 million. For Star Wars, I think a similar argument could be applied as it started to get harder for the general public to follow the expansion of the series. Thus, as Disney’s famous line-ups of content continue to evolve, I strongly believe that an entry barrier is being created.

Further, continuing to use Marvel as an example, as the universe expands, more and more characters are introduced making it hard for the general public to keep track of all the moving pieces creating yet another barrier to entry. In Phase 4 of the Marvel Cinematic Universe, characters called Moon Knight, Kamala Khan, Eros, Shang-Chi, Man-Thing, and She-Hulk were introduced with more characters likely following in Phase 5. And, because all the new characters play in the same Marvel Cinematic Universe, causing their stories to be intertwined, it is becoming harder and harder for the general public to casually watch a single Marvel movie.

It is hard to determine if the evolving series is having a profound effect on Marvel’s box office due to the disruption made by the pandemic; however, Marvel’s recent box office record has been poor. Excluding the Spider-Man movies as they are not distributed by Disney, there was only one movie, Doctor Strange in the Multiverse of Madness, that made it to Marvel’s top 14 box office movies after the pandemic. It may be the result of the pandemic and consumers’ shift away from the pandemic requiring more time before concluding that Marvel’s popularity is declining, but so far, I believe the trend is clear as there was only one popular Marvel movie starting from 2020 to today.

Disney’s Formidable Contents

Disney’s portfolio of content is not limited to just series like Marvel or Star Wars. Disney boasts world-renowned series such as Avatar, Cinderella, Snow White, Beauty and the Beast, and more. The company’s portfolio of content is arguably unmatched.

While I do agree that the king of content is arguably Disney. I do not think that the company’s current contents are enough for a streaming platform like Disney Plus. Average US adults spend about 30 minutes watching Netflix (NFLX) every day. As such, streaming makes it easy for users to watch multiple contents in a day, week, or month. However, Disney’s formidable content is not updated this often. For example, The Little Mermaid movie is coming out in May 2023. This comes after a movie back in 2008, 2000, and 1989. The nature of Disney’s famous content does not allow them to produce these popular names to meet the demand of the streaming customers, and the past success of Disney came from the sporadic release of famous titles, not weekly updates as it is required in the current streaming era.

Disney will continue to spend to keep Disney Plus full of content, but at what cost? By making more series in the Marvel or Star Wars series, the company, in my opinion, will only make the entry barrier harder for the general public. Or, as the company makes more series like Monster at Work, which is a spinoff of Monsters, Inc., Disney Plus will be in a hard position to capture adult audiences. Thus, in my opinion, Disney, while continuing to create TV shows of its existing content, will work to create new original content like American Born Chinese. If so, what competitive advantage does Disney have over other competitors like Netflix, who are already known for their plethora of original content? Overall, I believe Disney faces this fundamental risk where the streaming environment is challenging for Disney’s traditional content portfolio.

Importance

The performance of Disney Plus and Disney’s content portfolio is crucial to Disney’s future success. Disney’s Direct-to-Consumer business, or Disney Plus, lost about $1.053 billion in 2023 Q1, draining down the company’s operating income, which was about $3.043 billion. Also, Disney used $974 million in continuing operations for the quarter, which shows the impact Disney Plus’s performance is having on the company.

Further, in terms of valuation, the growth and the future profitability of Disney’s streaming are crucial. During the earnings call, the company’s management team said that the company’s “priority is the enduring growth and profitability of (the) streaming business” with a goal of achieving “profitability by the end of fiscal 2024”. I believe the company’s valuation of a forward price-to-earnings ratio of 25 has also reflected this expectation as it was announced by the management team, and if the fundamental risks that I have pointed out do hinder Disney’s future growth and profitability, the valuation metrics could be affected as well.

Summary

I believe Disney’s streaming business is facing a fundamental risk. Entry barriers are being created in some of the company’s most famous content like the Marvel Cinematic Universe as the story progresses and more moving parts are introduced. Further, as Disney’s past hits or past famous content were in a sporadic movie release format, it may be hard for Disney to compete in the streaming environment as consumers expect new content almost weekly on the platform. Therefore, considering these fundamental risks and the importance of Disney Plus to the company, I believe Disney is a sell until the company can show that Disney Plus could succeed.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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