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Disney’s share price: is Disney+ worth the cost?

Disney's [DIS] share price is up a hefty 24% this year. Driving growth are profits from its resorts and huge box office receipts from its blockbuster movies. Only last month Avengers: Endgame became the highest-grossing movie of all time, finally sinking Titanic.

But the house of mouse's ambition to jump on the streaming bandwagon with Disney+, is already eating into profits.

 

 

What is Disney+?

Disney+ is the magic kingdom’s answer to Netflix [NFLX]. As a new streaming service, it will cost $7 a month or $70 a year. Content will come from Disney classics, the Marvel universe - much to the chagrin of Netflix who lost its deal to stream the latest exploits of Captain America - and Star Wars. Original content will include spin-offs for fan favourite Marvel and Star Wars characters, including an Obi-Wan Kenobi series starring Ewan McGregor.

 

When’s Disney+ coming?

Disney announced that they’ll launch Disney+ in Canada, the Netherlands and US on 12 November, followed by Australia and New Zealand. Shares were up 1.3% on the news at the start of last week, but have since dipped to pre-announcement levels.

 

Why should investors care?

While Q3 saw revenues grow 33%, total costs were up 55%, much of it down to money spent getting Disney+ ready for launch. Once the streaming service comes online, analysts will be keen to see how Disney manages to convince subscribers to part with their money every month. 

33%

Disney's Q3 revenue growth

  

What challenges does Disney+ face?

Apple [AAPL] has announced it is spending $6 billion on original content for its new streaming service. The kicker for Disney is that Apple TV will launch just weeks before Disney+, potentially stealing much of its thunder. 

Disney has the advantage of its enviable back catalogue and some of the biggest franchises on the planet. Also, its service is $2 cheaper than Apple’s. But according to the FT, Apple has increased its spend on content from $1 billion to $6 billion and is finding willing partners in Hollywood. 

Then there is Netflix. While the streaming giant’s subscriber numbers have fallen this year, it is still the number one player in the market. It’s also upped its spending on original content to a massive $13 billion.

$6billion

Amount Disney is spending on original content compared with Netflix's $13 billion

  

What else to watch out for?


Sandra Kuba, an ex-financial analyst at Disney, has filed a series of whistleblower tips with the Securities and Exchange Commission.

Talking to MarketWatch, Kuba alleges that Disney has been overstating revenue for years. The filing alleges that during 2008-09 Disney could have overstated annual revenue by as much as $6 billion.

Allegations focus on employees in the parks-and-resorts business exploiting weaknesses in Disney's accounting software. Examples include recording revenue for $500 gift cards when guests only paid the discounted $395.

Disney has said the claims are without merit.

 

How do Disney's financials look?

Disney saw its net income margin jump from 18% in 2017 to 22% in 2018. Yet, analysts expect this to drop to 16% in 2019. Weighing on margins are restructuring charges and a lack of asset sales this year. The cost of Disney+ is another drain.

Expectations are that revenues will grow 17% to $69.7 billion in 2019. However, Disney is looking at declining profits combined with a 60% debt-to-equity ratio. This means the company will need to make good on this growth potential to sustain high earnings per share.

 

Market cap $242.484bn
PE ratio (TTM) 17.33
EPS (TTM) 7.77
Quarterly Revenue Growth (YoY) 32.90%

Disney share price vitals, Yahoo Finance, 27 August 2019

 

Is Disney a buy?

Over the past 12 months, the company has a price-to-earnings multiple of 17.33. Yet its forward PE comes in at 22.82, indicating that the stock is about to become more expensive. Worryingly, Disney's forecasted PEG over the next 5 years is -9.35. 

Among analysts, the average price target for DIS shares is 152.26. This would represent a 13% upside if hit. Credit Suisse also upgraded the stock from “Neutral” to “Outperform” at the start of August. We’ll have to wait until November to see if Disney+ was really worth the cost.

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