Checking in on Disney and All the Opinions About It

The Walt Disney Company (DIS -0.41%) is the subject of a wide range of opinions. Despite strong first-quarter results, Wall Street analysts have very different views on varying parts of the business. Joining host Chris Hill in today's episode of Motley Fool Money, Motley Fool analyst Bill Mann takes an in-depth look at the following aspects of Disney's business:

• The strength in the parks division.
• How Disney+ was the company's life raft.
• The brand-extending powers of streaming video.
• Bob Chapek's track record in his two years as CEO.

Later in the show, Motley Fool analysts Asit Sharma and Emily Flippen discuss an underrated financial metric to know about before investing in any consumer goods or subscription business.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Feb. 10, 2022.

Chris Hill: Today on Motley Fool Money, the house that Micky built is under the microscope. So we're going to take a look and see what we see. I'm Chris Hill, joined by Motley Fool Senior Analyst, Bill Mann. Thanks for being here.

Bill Mann: Hey, Chris. How are you?

Chris Hill: I'm doing well. One of the things that I like about stock investing is the different views that happen every single day, and this is something you've talked about before that when you buy a stock, someone is selling you that stock. Empirically, you're bullish on it, and they're bearish on it. I like that there are different views. I like that. Yet, as I was saying to you earlier today, when it comes to the Walt Disney Company, I really can't recall a time when there were so many different views about the different parts of this business. Before we get into their latest results, let me start with this. What is the most interesting thing to you right now about Disney?

Bill Mann: I think the most interesting thing is the fact that their theme park revenue was up over 2019 on a per person basis by 40 percent. Now, Disney is obviously a huge number of components, but I think probably the thing that is most concrete for the company is when people are willing to spend a huge amount of money at one time to come and have the Disney experience, and that 40 percent per person. I don't want to emphasize that because it's an incredible number to me because the numbers that it costs to go to Disney in 2019 were not low. In this most recent quarter, 2021, I should say, it was 40 percent higher per person. That says to me that the Disney brand has withstood every bit of the potential pressure that it was under during COVID.

Chris Hill: Let's stick with the parks then because, as impressive as the numbers are, it's still taking place in an environment when they're not at capacity. There are still restriction on the park. I don't know what the percentages of international travelers going to Disneyland in California or Walt Disney World in Florida, but it's significant enough that if you're a Disney shareholder, it's understandable you would be excited looking at these numbers and thinking, "Wow, they're not even at the point where they're getting a significant amount of the international travelers that they normally get."

Bill Mann: I think that's exactly right. There are some analysts who have come out and said that they think that it's going to be years before Disney's domestic park segment is back up to full capacity. I don't know whether that is is the best way to think about it or whether it will be that long. You tell me what the next step for the pandemic is, and I'll tell you whether that's accurate or not. But yeah, it's really incredible. For everything else that Disney does, their parks or their crown jewels in the parks, their results were, to me, even given the fact that they are under wraps to some degree, absolutely staggering.

Chris Hill: Yet the streaming service is getting, I don't want to say all the headlines, but a lot of the headlines in terms of the surprise that they've added the number of subscriptions that they did. They're now at 130 million total subs for Disney Plus. I don't know. [laughs]

Bill Mann: That's such good analysis. [laughs]

Chris Hill: When I say I don't know, what I'm really saying is I'm torn in a couple of different directions because, on the one hand, this is an enormous number and the growth for what is still a relatively young business in terms of how long this business been up and running, it's an incredible number. When I refer to so many different views, one of them is a not insignificant number of analysts coming out and saying like, in some combination of, "This still isn't all that impressive, and by the way, they're not making any money off of it."

Bill Mann: The second part is true if you segmented in the way that, obviously, accounting suggests that they're segmenting it accurately. If you think about going back to early 2020 when the theme park shut down, suddenly ESPN had literally nothing to broadcast, and they rolled out Disney Plus. Disney Plus was their life raft. But what Disney Plus has done, in the meantime, is it has reinforced every single one of the Disney properties to the extent that Marvel is still big, that the Disney characters are still big, that they've been able to roll out multiple characters based upon Star Wars. When the parks were able to start to come back to capacity, that's what people wanted to consume. I know it was a big movie in its time, but Avatar was watch-it-and-forget-it, and suddenly the Avatar component in the Disney Animal Kingdom Theme Park is massive. It is a massive draw, and I think it's important just to keep in mind for Disney that, yes, there is something to be said for the fact that streaming is probably driven by their capacity to roll out new content. The Book of Boba Fett and then The Beatles' retrospective Get Back were huge. So yes, it is not a perfect comparison to Netflix, but 130 million in two years, I don't care who you are, that's amazing.

Chris Hill: Is it just a function of the short-term thinking on Wall Street that companies like Disney are always going to get dinged for investments? The things that you're talking about, particularly on the theme park side of things, they're constantly looking to upgrade and put in new features and that sort of thing, that takes money, that takes time. It seems like not every quarter, but at least once a year, someone's coming out and just dinging Disney for the amount of money that they are investing in their properties, even though history, as a guide, says, "That's a hell of a great investment."

Bill Mann: Yes. I think part of it, Chris. This is going to be the super boring part of the segment. But if you were to open up the financial statements of Disney, you could not point to me on the balance sheet where they keep the value of the characters, where they keep the value of the properties. Those characters, and I think to Wall Street's defense, when you have an intangible asset like these that require some semblance of reinvestment, it's really hard to pull that thread through and say, making sure that we rolled out with this new content for Boba Fett, for example, reinforce the overall value of Star Wars because I know a lot of people think that Star Wars is a real thing, but it is intangible. It does not really exist except through that reinforcement. But if they don't reinvest in this, then it calls to question the entire Disney experience, and so they're going to continue to do it, and it will continue to be a struggle for Wall Street to put their finger on what the return is. But the returns are much bigger than I think the Disney bears are giving them credit for.

Chris Hill: Later this month Bob Chapek is going to hit his two-year anniversary as CEO. How do you think he is doing?

Bill Mann: Bob Chapek and Bob Iger, the Bobs, came out and announced their changeover in early 2020. Then immediately afterwards, COVID hit, and Bob Iger came back in and said, "I'm going to take a little more of an active role for a while," which could have been a sign of a weak incoming CEO. That could've been something that seemed like it was undermining Bob Chapek, and they managed it perfectly. They managed every bit of it perfectly. Bob Chapek is someone who does understand completely the value of these intangible assets, and I don't think he's done a perfect job. But I do think that he has done a really great job in circumstances that probably were unimaginable at the point in time in which they were planning his succession and his stepping up into that role.

Chris Hill: I agree with you, and I think that one of the way Chapek is improving as the CEO is saying out loud how much he appreciates the intangible. One of the knocks on Chapek early on, and it was a completely fair knock, was that this is a guy who doesn't seem to express not reverence for the creative side of the business, but just a healthy respect for the creative side of the business, and I think he's doing a much better job of that now.

Bill Mann: I think, partially, he's not a particularly emotive CEO. He is not. This is not Steve Ballmer jumping around on the stage for better or for worse.

Chris Hill: Nobody wants that. [laughs] Nobody really wants that.

Bill Mann: You take that back. I want that desperately from the CEO of Disney. He is much less emotive, but I think given his background, it doesn't really make sense to me at all that he does not understand deeply that the value of those properties. The value of that character library is the value of Disney. So I think that that was a little bit unfair because he just doesn't jump up and down about them but he has shown through his actions that he values them very highly.

Chris Hill: Last thing and then I'll let you go. In terms of the stock, shares of Disney are only slightly higher than they were when Chapek took over as CEO.

Bill Mann: It sounds like of a miracle to me. [laughs]

Chris Hill: Very eventful two years. What do you think when you look at the stock? Early in the pandemic, this thing got knocked down in a big way. It has bounced back up from there. What do you see when you look at it now?

Bill Mann: When you look at Disney Plus it's about to come into 42 additional countries this summer. Obviously, the parks in Japan and particularly in China have been impacted greatly, so I think that there is plenty of room for a rebound. They're not saying that's going to happen in 2022 because China is on an entirely different trajectory with COVID, as is Japan, but there is plenty of value to be extracted. I do expect to see more series coming out on the Marvel platform, more series coming out on the Star Wars platform. I think we are underestimating the power of Disney at our own peril.

Chris Hill: Always great talking to you, Bill. Thanks for being here.

Bill Mann: Thank you so much, Chris.

Chris Hill: Obviously, so many different metrics go into evaluating a business like Disney. But let's face it, some metrics get more attention than others. Up next, Asit Sharma and Emily Flippen are going to discuss an underrated financial metric you want to keep your eyes on before investing in any consumer goods or subscription company. Just a heads up, we had some technical difficulties with this segment so the audio is a little wonky.

Asit Sharma: I'm Asit Sharma, an analyst at The Motley Fool, I'm joined by my colleague, Emily Flippen. Emily, we're back in the saddle again. Today, I wanted to pose a question to you. There is something that I know you really start jauncing over when you look at a prospectus or an S-1, so the registration documents for a company that's coming public. I know you look at this too for companies that have been around for a while and that is the relationship between two metrics: customer acquisition cost and lifetime value. I think we got to explain them first, or maybe if you could explain these two metrics. Tell us why you're so obsessed with them and why they are useful to investors.

Emily Flippen: To start, it's great when you have a metric that encompasses business activity in a really intuitive way. I think that's what the customer acquisition cost to lifetime value metric does, especially for those consumer-facing subscription-style businesses. It really is very self-explanatory. It's a ratio of the customer acquisition cost to the value of that customer over time, so it's effectively how much earnings you get for each dollar of marketing spent to acquire a customer. In a basic sense, you can think about that top number, the customer acquisition cost, the marketing that you need to bring a customer into your ecosystem, and the lifetime value, just how much money that customer will spend on a product minus the cost to produce that product, which really gets at the gross margins of the business. So that ratio, on my opinion, removes a lot of the noise around business performance and hammers down on just the fundamentals.

Asit Sharma: Would you say that it's fair that you can derive a lot about a business's long-term success by understanding the relationship between these two metrics?

Emily Flippen: Certainly, and I will say it's a hard thing to create yourself so you do rely a lot on management of the business to produce these numbers for you, and then sanity check them against your own expectations. But you can really think about it like a fundamental return on investment for a business on the consumer-facing side, so they're spending more money to acquire a customer than that customer has value over time. They're essentially losing money with each customer they bring in. Obviously, that sounds and is not a great thing for return on investment.

Asit: Emily, you make it sounds so simple, and I know it is. But here's what trips me up sometimes, in order to gain market share, in order to get ahead of competitors, some companies spend a lot upfront on their marketing and promotional costs. What they're saying is, "I'm good going overdrive with acquiring the customers, and I'm going to run this relationship at a loss even for several years because, over time, especially if this is a subscription business, I think, with loyal customers, that's going to have a pay off. Maybe I stretch out that payback period, but once I've crossed the Rubicon, and I've got this critical mass of customers, they love my product, I'm going to be off to the races. Would it be fair to say that you give a path to companies whose brand you love, whose product you think is superior but are really pumping up those upfront marketing costs in order to obtain customers?

Emily: Certainly, and I think anybody who listens to me frequently will not be surprised to hear me say that I think Chewy is a great example of this. It really is an opportunity for investors who understand metrics like lifetime value of customers and acquisition cost to get an advantage over those investors who don't because a business can look unprofitable on their income statement, as was the case with Chewy when they went public but still have extremely attractive value associated with that customer. The reason why they are unprofitable is because they're spending so much money on marketing to bring those customers in. But once those customers are in the ecosystem, they spend a lot more money over time, so the profitability and the free cash flow comes in future quarters and future years. Chewy is a great example of that, and part of the reason why I was really sold on them when they initially went public was because in their S1, in their initial filings statements they actually broke down the customer acquisition cost to the lifetime value of that customer over time. You could see in year 1, that ratio was less than one, which says, "Okay, in Year 1 we're spending more money than that person is earning on our platform." But for the people who stay on to Year 2, and Year 3, and Year 4, all the way up to year 6, when they went public, they spent over a ridiculous amount of money on the platform that comes straight to the bottom line. It's worth it for them to spend that money upfront to acquire the customer.

Asit: Emily, you remind me of something that I really look for when I'm looking in prospectuses and trying to judge whether a new company has a persuasive economic model, and that is cohorts. Companies that are really good at expressing the relationship of their acquisition costs to lifetime value often will provide you with some really easy to understand visual charts. If you're listening to us today thinking, "Man, that sounds like something that I'm not going to have time for, or quite understand. I don't know how to calculate these metrics." you can look at an annual report or an S1, a registration statement, before a company goes public and you often get a really nice graph which shows you how different cohorts perform over time. Let's say a group of customers starts in Year 1, the next year we add on the second group of customers, the third year we do the same, and we can see on the graph how those images start to increase. They widen out. That means each cohort is becoming more valuable over time, proving out this proposition. I wanted to say, if anyone's listening today and has some time, look through the annual report of a customer-facing company that you love. You might see these graphs, and it makes it simple to understand how the economics are panning out.

Emily: It's actually a red flag if you look at a business that you think should have some of these metrics, and they're not breaking them out. Before the show, we were talking about Blue Apron as a good example of this. Now, this is an old company, old news here, but when they went public, they didn't explicitly break out their lifetime value of the customer or their customer acquisition costs, so investors were left to wonder. When you see those ratios missing from, especially something like an initial filings statement or an annual report and you feel like they should be there, it can be in your immediate assumption that, "Hey, maybe those aren't great, and that's the reason why management isn't being really upfront about it." It's really important to question yourself, should these metrics be in their report, and if so and they're not there, why aren't they there? But also, how are they calculating it? Because these, while they're industry standards, they're not regulated terms. There's no single way to define the acquisition cost, or the lifetime value of a customer, and good businesses will walk you through that definition, how they came to that calculation, and you can think to yourself, "Okay, does this make sense given my understanding of the business?"

Asit: I agree, and sometimes I penalize a company for not giving the specific breakdown of how they calculate their metrics or not providing really good visibility in both that customer acquisition cost and the lifetime value, so I can see what the relationship looks like. But once in a while, I'll give a company a pass. A recent example was Allbirds, symbol B-I-R-D. This company just came public. It's basically a high-tech shoe company. What I really liked in their S1 is they defined clearly what their customer acquisition cost is. It's simply their total marketing cost divided by the new customers that came in on that marketing spend. But they talked also about their contribution profit. So think of gross profit, that is what you have, after getting your revenue, you subtract your cost of sales. Contribution profit, you burden that gross profit with a few other costs like shipping and fulfillment. What I really loved was that, in their S1, Allbirds said, "Look, our contribution profit, our gross profit minus the cost to ship our product to customers, a few other costs, that consistently exceeds our customer acquisition costs. If you compare those two costs, we're making money right upfront with our customers," which is rare. It's the opposite of what many companies do when they are front loading that marketing expense. Even though, Emily, they didn't provide a detailed breakdown of these metrics, they gave me enough that I could reverse engineer. The company has the potential to be pretty profitable down the line. Now, this is a really competitive industry [LAUGHTER] , so there's a lot more to consider. But I'll give a company a pass when they talk about contribution profit and show me the relationship between these variables because I'm a gross profit type of guy. I always say gross profit pays the bills, if your fixed costs aren't rising, so pay a lot of attention to that, just to say that companies have different ways of providing these insights on what their customer costs are. At the end of the day though, at some point in the race, you have to have that lifetime value start to exceed the cost of acquiring each customer.

Emily: It's OK if it's not starting out that way, but have a plan for how it's going to reach profitability. A good last example is Peloton, which did break out their lifetime value of their customers, nearly $3600, and they were going public. However, they were losing around five dollars per customer acquired because their acquisition costs were so high. They plan to get it down, clearly, were not able to do so. But if you have a plan and you are willing to give passes, understand when you're doing that in your investments because the difference between Chewy and Peloton is clear enough as day today.

Asit: At the end of the day, I think it is all about those economics, especially as you scale out. Chewy is a great example of a company that's doing it well. They're scaling their product. Those relationships have remained consistent, so there is a path for them to exceed their fixed cost base, which is pretty large, which is why I think you have a lot of faith in Chewy. Also, Emily, I think you are a very happy customer of theirs, but that's all part of it. Keep the customer happy.

Emily: Me and my cat.

Asit: Keep Emily ordering. That's how you build that lifetime value.

Emily: Well, Asit. Thank you so much for this conversation. I hope everybody takes it upon themselves to go calculate the CAC to LTV on their own time now.

Asit: Always fun. See you soon, Emily.

Chris Hill: That's all for today, but coming up tomorrow, we'll have the latest from the cyber security industry, and on Saturday, we'll dig into the business of the Super Bowl. As always, people on the program may have interest in the stocks they talk about and the Motley Fool may have formal recommendations for or against, so don't buy yourselves stocks based solely on what you see hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.