Disney (NYSE:DIS) had a big 2019 -- a 32% share price gain notwithstanding. It closed its $71 billion acquisition of former rival studio Fox; it opened two of its largest theme park expansions ever with Star Wars: Galaxy's Edge in Anaheim, California, and Orlando, Florida; and it utterly crushed the box office competition with seven of the top 10 highest grossing films of the year, including the highest grossing box office film of all time, Avengers: Endgame.
Oh yeah, it also launched the much-anticipated streaming service Disney+, starring "Baby Yoda" in The Mandalorian. Mickey Mouse, CEO Bob Iger, and the top brass at Disney were exceptionally busy last year. But it's the streaming service that is rightfully getting a lot of attention as of late. In fact, analysts over at Barclays said Wall Street is pegging the valuation of the nascent segment at $108 billion, leaving the rest of the Disney empire valued at just over $200 billion. Placing a value on individual segments is subjective, but if accurate, that makes Disney one cheap stock.
Is $108 billion too much, though? At the time of the research notes, Disney's total enterprise value (share price times number of shares outstanding, plus total debt, and minus cash) was about $320 billion, which would imply a third of the whole business' value is just streaming. The direct-to-consumer division (which houses Disney+, Hulu, and ESPN+) is new and ran at an operating loss of $1.81 billion on $9.35 billion in sales during the 2019 fiscal year. However, that's before Disney+ launched, which reportedly had 10 million households sign up on day one. It also doesn't include a full-year of Hulu since Disney didn't assume control over the streaming service until after the Fox deal was complete back in the spring of 2019.
Let's assume the $3.43 billion in fourth quarter 2019 sales from the direct-to-consumer segment (without all of Hulu and no Disney+) will carry over into the next year with a 5% quarterly growth rate. That puts 2020 full-year sales at about $15.5 billion. If we apply Netflix's one-year forward price-to-sales ratio (since it, too, is high-growth but currently unprofitable) of 6x to Disney's streaming segment, it would be valued at $93 billion, or just shy of a third of Disney's total valuation. However, given the fast growth of Disney+, it's quite possible that my 5% growth per quarter figure is too conservative. Either way, since Disney's streaming platform isn't Netflix -- it's currently only available in the U.S., Canada, the Netherlands, Australia, and New Zealand -- using a conservative growth figure is warranted. Either way, the valuation of $108 billion for Disney streaming doesn't seem too far off and looks like a fair value -- especially for a streaming platform that is still very much in the early innings of its growth story.
$300 billion is not enough
The rest of Disney -- made up of media networks, parks and resorts, and studio entertainment -- is very much a profitable and growing business. Total revenue (excluding direct-to-consumer) expanded 7.5% to $60.2 billion last year. Operating income excluding the streaming business grew just 2% to $16.7 billion. A number of factors weighed on the bottom line, including lower profits at the legacy cable and broadcasting businesses and costs associated with opening the two new Star Wars: Galaxy's Edge parks.
Thus, if this remaining portion of the empire of Mickey is being valued at just over $200 billion, Disney, less its streaming ambitions, is going for about 12 times operating income before interest payments and taxes. That looks like a deal to me on the world's most popular theme parks and dominant entertainment studio. The cable and broadcasting divisions are struggling as consumer cord-cutting continues, but it's holding its own and still very much a profitable enterprise. Add in a large and fast-growing internet-based home entertainment division, both Disney the theme park/movie studio/cable operator and Disney streaming look like pretty good buys at the outset of 2020 -- even after last year's double-digit rally.