While the stock of Disney (DIS 0.24%) soared during the early 2000s, the past five years have not been as kind. The streaming and cord-cutting revolution, along with maturing growth franchises, has caused the stock to dip to levels not seen since 2015 at one point this year.
But if a stock can lose its way for five or 10 years, it can also recover in that amount of time as well. That's especially true for powerful brands like Disney. So here's how Disney expects to get its mojo back over the next decade.
NYSE: DIS
Key Data Points
More of a travel and experiences company
In September, Disney management announced it would accelerate its investment in its parks and experiences division. Management said it would double its capital expenditures in these areas to $60 billion over the next 10 years, with a gradual ramp-up over time.
That equates to an average of $6 billion per year. For perspective, Disney spent $5 billion in capital expenditures across its entire business in 2023.
The investment will expand hit franchises like Frozen to new parks, while bringing others like Black Panther's Wakanda and Coco to parks for the first time. In addition, Disney will be taking on three new cruise ships over 2025 and 2026, doubling the size of its current fleet. Cruising has become a more and more popular way to efficiently travel over the past decade, and Disney clearly sees more opportunity there.
After the pandemic, it's clear that consumers are seeking experiences, and Disney has benefited. In 2023, Disney's experiences segment grew 16% with 23% operating profit growth. Moreover, the experiences division's $9.0 billion in operating profits dominated Disney's stagnant entertainment profits of $1.4 billion and the sports segment's $2.5 billion.
Given the company's sterling success with experiences, it's no wonder management is investing more behind that division. So while experiences made up 36% of Disney's revenues last year and 70% of segment profits, those percentages could get even larger five years out and beyond.
Image source: Disney
Less is more in entertainment
With the company's experiences segment picking up more of the growth load, there may not be as much pressure on the entertainment division.
But that could be an overall benefit. In fact, Disney now seems to be course-correcting its mistakes over the past few years. When the streaming wars broke out, companies began spending on ever-increasing amounts on content. But CEO Bob Iger recently admitted on Disney's latest conference call that Disney's films and streaming content may have suffered from trying to do too many things:
At the time the pandemic hit, we were leaning into a huge increase in how much we were making. And I've always felt that quantity can be actually a negative when it comes to quality. And I think that's exactly what happened. We lost some focus.
This year, Disney reduced its content spending from $30 billion in 2022 to $27 billion in 2023, and just guided for $25 billion in 2024. In addition, Disney has raised prices and looks to increasingly monetize streaming through more effective digital advertising.
Making less content but a greater percentage of hits while reducing overall spend should help get the entertainment division's profits growing again, as long as better-performing movies and shows materialize. And with the experiences division doing the heavy lifting on growth, Disney's content creators can perhaps relax and focus on generating high-profit hits as opposed to lots and lots of content that may not resonate.
Sports unbundled and ESPN unleashed
Disney's other major segment is sports, underpinned by ESPN. In fact, sports rights for ESPN will actually make up 40% of content spending this year, highlighting ESPN's importance. In fact, ESPN is perhaps the main element holding the traditional cable package together. And while traditional cable is declining, people still value live sports, and advertisers value the wide audiences that come from marquee sporting events.
While there is ESPN+ today, that direct-to-consumer offering is mostly supplemental content to the core ESPN still offered in cable packages. Still, even Iger seems to understand a standalone ESPN streaming app is "inevitable," as he noted on the recent conference call.
But rather than just transferring the current ESPN cable network into its own app, it appears management has eyes on something bigger. At its recent employee presentation, management noted it wanted to bring the upcoming ESPN direct-to-consumer app integrated with enhanced features like advanced statistics with links to branded fantasy sports, among other innovations. Iger also noted ESPN is looking for outside partners to launch that full ESPN stand-alone app, across technology, marketing, and content.
With the app's launch set for 2025 or earlier, look for ESPN to not just be a streaming version of its current network, but rather an enhanced global sports hub beyond what the network is today.
Disney to become more of and travel and experience company
Disney's core advantage is not only its content creation machine, but its ability to monetize that content in many ways. With the media business undergoing challenges amid cord-cutting, Disney still sees an opportunity to monetize its brands through more experiences.
Five years from now, it's likely an even greater majority of Disney's revenue and profits business will come from experiential parks and cruises. And by delivering more experiences, it can now take its time in content creation. Taking its time should produce a higher percentage of hits, which should increase returns on capital.
That should lead to steadier profits, and not just growth for growth's sake. Hence why Iger just revealed Disney would reinstate its dividend before the end of the year, with management guiding to $8 billion in free cash flow in 2024, up from $5.2 billion in 2023.
But that should just be the start of a new more profitable path for the company as finds the right business model in the post-streaming age.
