I initially set out to do a deep dive on Disney, but didn’t quite realize what that meant. Disney is a monster, with an insane amount of complexity. So, I took the easy way out and decided to lay out the evolution of my thought process on this company.
Strong Brand: Disney has an amazing brand. Whether it’s Star Wars, Marvel, or Disney, these brands are thriving and offer Disney long-term stability.
Valuation: Examining Disney’s financials, it’s fascinating to note that its Parks segment nearly justifies its entire valuation. Roughly speaking, Parks contribute around $10 billion in operating income, while Disney’s market capitalization hovers at approximately $160 billion. Remarkably, Parks operate at an impressive 31% operating income margin—a feat even tech companies struggle to match.
Pricing Power: My main concern centers on Disney’s pricing power. They’ve leveraged it for decades, but we’ve recently witnessed its limits, particularly with ESPN. I think they found their limit.
Brand Extension: A strong brand should yield successful brand extensions. However, Disney’s rapid expansion of Disney+ may have stretched their brand too thin. Recent concessions during a carriage dispute raise questions about the brand’s resilience.
Unit Economics: While Disney’s media business appears undervalued, its unit economics are deteriorating. The shift from linear networks to direct-to-consumer (DTC) is inevitable but fraught with challenges.
I’m calling Disney a brand trap because it reminds me of a value trap. The brand is just too good to be this cheap, but when you start to look at the benefits of the brand, they’ve been cashed in already. For Disney, they’ve lived off massive price increases inside parks and ESPN for decades. ESPN finally found the line on price increases in their standoff with Charter. A major benefit of having a brand is being able to have strong pricing power and Disney absolutely had this, but they’ve arguably used it all. Not only have they used up the pricing power the brand brought them, but they’ve also used up a lot of their brand extension possibilities as well in their quest for Disney+.
The Bull Case to Watch
If you can’t tell by now, I’m throwing Disney into the watch pile. So many moving parts here, I don’t think we’ve necessarily hit the bottom. Disney has to learn how to grow without jamming price increases, but I do think they are well positioned to achieve this. An ad based business model can help achieve this, allowing you to continue to grow without increasing customer’s pricing. It’ll be an awkward transition and one that I’m not convinced Disney will nail. It might sound odd, but it’s historically been the best way to go DTC. People hate ads, but the love free more.