Video streaming in South Africa is booming as customers look for more affordable entertainment options than pay-channel DSTV. Projected revenue in video streaming locally is expected to reach R4,6 billion this year, representing a growth rate of over 8%. Further projections show the user penetration rate, the percentage of the SA population using streaming services like Netflix, ShowMax, Amazon Prime and Disney+, to increase from 13% today to 15% by 2027.

In the face of this rapidly evolving media and entertainment industry, many traditional content houses are struggling to survive. We believe that with its rich history spanning over 100 years, the company started by two brothers, Walt and Roy Disney, immortalised by the cartoon character Mickey Mouse, has a good chance of performing well as a share in the future.

At its core, Disney has not changed, but the environment in which it operates has evolved significantly – and we are certain this will continue to be the case. From its origins in 1923, Disney has had to navigate large technological advances, including the introduction of sound, then colour, in film, a move to computer-generated animation, and now a platform and distribution change from linear film and television to streaming.

Disney today

There are currently three main operating segments at Disney, with the first two closely tied to the content engine. Firstly, entertainment is at the heart of Disney and remains the most popular side of the business. It includes the loss-making, but fast-growing direct-to-consumer (DTC) business (Disney+ and Hulu), the highly profitable but declining linear business (channels and networks) and the content sales and licensing business, which distributes content to third parties, including cinemas.

Secondly, there’s the experiences part of the business, which includes the theme parks situated around the world and the licensing and sales of consumer products. With the current losses in streaming, parks and experiences make up 54% of group operating profit, recovering well post-COVID.

Finally, there’s the sports segment of Disney’s business, which comprises ESPN and ESPN+ streaming. It doesn’t benefit as much from the full content engine, but is a useful tool for streaming differentiation and bundling linear channels.

Why the investment case?

Amidst all the disruption caused video streaming largely displacing TV channels as a means of providing popular entertainment, it is not yet clear what the industry structure will ultimately look like, but we believe Disney has a reasonable prospect of success. When it launched in 2019, Disney+ garnered 10 million subscribers worldwide on its first day, evidence of the significant intellectual capital the company possesses. It has a valuable treasure trove of content creation, content library and distribution.

Disney’s linear entertainment assets (channels and networks), while in decline, are still very profitable, generating free cash flow and adjusting to a declining customer base. The company is open to divesting these assets at some point.

Core to the investment case for Disney is its superior content and franchise creation. We believe Disney has taken the correct strategic direction by focusing more on product quality than quantity. This has not been the case over recent years. In addition, after a recent lean patch at the box office, Disney announced an “entertainment-first mentality”. Disney CEO Bob Iger has openly spoken about a changed focus from messaging to entertaining. The business has been reorganised to restore authority and accountability across the content cycle to the creation teams, after these had been separated a few years ago.

The potential upside can be seen from the numbers: Disney had six of the top 10 streamed movies across all platforms in the US in 2023, and the studio business was number one at the global box office in seven of the last eight years. The movie pipeline for the next few years looks solid, with titles such as Deadpool & Wolverine, Inside Out 2, Avatar 3 and a standalone Mandalorian film.

On the negative side is Disney’s streaming business, which lost US$2.6bn in the 2023 financial year. However, there are signs that the financial performance has passed an inflection point as operating losses improved by $986 million when compared to 2022 and even faster in the first quarter this year. Disney now aims to hit profitability by the end of the 2024 financial year.

In terms of sports, ESPN is probably the strongest sports brand in the US. We believe Disney can successfully manage the process of launching ESPN Flagship, a DTC streaming service, in 2025, despite the headwinds facing linear sports broadcasting.

Lastly, the experiences business continues to be the primary monetisation avenue for Disney’s intellectual property. It has produced strong returns over time and continues to underpin the value of the group. Disney’s confidence in the business was highlighted by its intention to inject $60 billion over the next 10 years into its parks, resorts and cruises.

Based on the reasons outlined above, we believe Disney is looking promising as a stock to invest in, given that its share price doesn’t reflect the underlying value of its key parts. The company’s management will need to focus on creating shareholder value in the years to come. More important in the near term will be for Disney to make the right decision when choosing the next CEO, as Iger’s contract expires in 2026.

The balance sheet is currently in a reasonable position, so much so that a dividend was recently announced, as well as a $3 billion share buyback. While Disney has performed strongly off its lows, it still trades below its intrinsic value with additional upside optionality.