Is all well in the House of Mouse and should Australians invest?

Ask most adults about Disney (NASDAQ: DIS) and they might quote their favourite animated classics back at you. Or they might recount getting drenched on Disneyland’s Splash Mountain. The idea of Disney as an investment in the average Australian portfolio wouldn’t likely come up – though it’s far from alien to American investors.

The House of Mouse has been getting a hammering lately from an investment perspective, and with Goldman Sachs tipping it as undervalued, perhaps it’s time to take a closer look and ask what it means for Australian investors.

I spoke to Alphinity Investments’ Mary Manning and Magellan’s Ryan Joyce for their insights into the much-loved brand.

Hakuna Matata?

It’s difficult to name a specific blockbuster animated hit from Disney in the past couple of years. Recent offering "Wish" fell far below big earners of the past, like Big Hero 6, Moana or (and my apologies to any parents of young children for this reference), Frozen and its sequel. The upcoming release schedule shows a heavy reliance on sequels too – with yet another Toy Story in the mix.

To add to its woes, Disney has been hit by criticism of its franchise offerings. Marvel, for example, was knocked by concerns over bloated storytelling and poor CGI. The previously innovative Pixar has failed to hit heights with any of its recent releases such as Elemental, and has turned heavily to sequels.

Then, if you turn to Disney’s theme parks, you’ll find cost-of-living pressures are hitting hard. There have been steep hikes in Disney’s prices and Disney World saw hotel occupancy rates fall in busy periods.

The jack-of-all-trades also has a streaming service – which is notably behind competitors like Netflix. It also recently announced a $1.5 billion equity stake in Epic Games (known for Fortnite) with the suggestion it intends to expand its IP into the metaverse.

As Joyce puts it, “the business model challenges have contributed to, and been compounded by, management drama rivalling that of Succession.”

Consider that Disney also acquired 21^st Century Fox for US $71 billion just before COVID hit and impacted its earnings. It has also had a failed CEO succession with Bob Iger leaving in 2020, only to return in 2022 after internal unrest and his contract has been extended to 2026.

You’ve got a friend in me (not…)

In addition, Trian Funds Management owns $3.5 billion in Disney stock. CEO Nelson Peltz (that’s Brooklyn Beckham’s father-in-law, for those who follow the gossip) has launched a heavy campaign to gain board seats for Peltz and ex-Disney exec Jay Rasulo and replace Disney CEO Bob Iger.

“The whitepaper from Trian is 135 pages long (the length itself is a red flag!) and outlines Disney’s chronic underperformance due to a strategic, financial, cultural and managerial missteps. 

Some of these concerns are backward looking and are already reflected in Disney’s share price, but it does highlight quite a few red flags for investors to consider,” says Manning.

In the last few days, Disney has gained endorsement from proxy advisory firm Glass Lewis, encouraging Disney shareholders to withhold votes for all board candidates except the company’s own.

Let it go, let it go…

Neither Alphinity nor Magellan currently hold Disney.

Joyce appreciates Disney’s unique abilities of the past, but says, “The ongoing shift from linear to streaming services creates significant challenges for Disney to navigate and a wide range of outcomes around its future earnings power and ultimately its valuation.”

“Disney has been in a deep multi-year earnings downgrade cycle and therefore does not currently fit our process,” says Manning.

That said, Manning adds, “The last set of results were stronger than expected and the stock rallied on management commentary and guidance. Disney is now getting small upgrades for FY24 primarily due to cost savings.”

For Manning to reconsider Disney in Alphinity’s portfolios, she would need to see upgrades continue on a sustainable basis, and the drivers of those upgrades to expand to more broad-based earnings recovery.

“There are a few avenues for Disney to achieve this namely, profitability in the Direct to Consumer (DTC) business, re-acceleration of top line growth at parks and experiences, and revenue contribution from new partnerships,” she says.

Everybody wants to be a cat streaming giant

Disney is on the verge of profitability in the streaming sector – but it is far behind competitors like Netflix (NYSE: NFLX).

Joyce is positive about the prospects of streaming services.

“There is also a significant opportunity for streaming services to continue to grow their share of TV viewership and the revenue that comes with it. Importantly for investors, industry competition has become more rational over the past 12 months as higher interest rates and moderating subscriber growth have seen the mindset of newer entrants shift from subscriber growth at all costs to monetisation (no more password sharing!) and profits,” he says.

While he believes Netflix, Disney and Amazon (NYSE: AMZN) are well positioned in this space, Joyce believes the cleanest exposure is Netflix.

Manning is more wary of streaming.

“The so-called streaming wars have meant that profitability has been challenged for a number of players and, until recently, the sub-sector continued to see non-linear impacts from covid,” she says.

Her favourite content subscription model is actually Youtube and she says, “This division has been a consistent stand out in Google’s (NYSE: GOOG) results for many consecutive quarters and it is both high growth and highly profitable.”

Can e-games ‘Go the distance’

Disney’s stake in Epic Games is not the only major business foray into e-gaming. Netflix is also stepping its toe into the waters.

But can it work?

As Manning points out, Disney has tried this before when it tried in-house games in the 1990s and 2013 and purchased Club Penguin in 2005 (a failure).

“Given this track record, Disney/Epic may be a successful partnership, but to date, the e-gaming strategy feels a bit like throwing spaghetti at a wall. So far nothing has stuck,” Manning says.

Joyce is also hesitant on the partnership between Disney and Epic.

“Historically, TV and movie studios have struggled when they have moved into game development, with partnerships or IP licensing having proven more fruitful. Netflix’s tech roots could see it become an exception to this,” he says.

He does note that video games can offer a way to better monetise IP from TV and movies and improve its durability. Spiderman and Star Wars are examples of this, while Super Mario shows how movies can leverage gaming IP.

When you wish upon a star

Be it Disney or any other company in this space, there are a few tips to consider in assessing them for investment.

“I think it is very important for investors to be honest with themselves about how much conviction they can have in what those businesses look like in the medium term, and how much profit they can generate," Joyce says.

It is also important to consider to what extent different media companies are hit-driven or sensitive to the popularity of their content."

He reminds investors that Disney is more sensitive to the performance of key IP franchises like Star Wars, Marvel and Disney characters compared to a business like Netflix.

Manning suggests it comes back to the basics – you shouldn’t treat stocks in this space as exceptional, but use the same analysis you would for any other industry.

“If the stock is getting earnings upgrades and is high quality and reasonably valued, then it warrants further analysis,” she says.

It’s a small world after all

If Disney still floats your boat, there are multiple ways to invest.

Some trading platforms offer direct exposure to US equities. Alternatively, you could play it a bit safer by looking at an index investment covering the S&P 500, Nasdaq 100 or the Dow Jones.

Either way, do your research and in the words of Scar, “Be prepared.”

ETF

Alphinity Global Equity Fund (Managed Fund) (XALG)

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ETF

Magellan Global Active ETF (MGOC)

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