Disney (DIS) is a difficult stock to value at the moment as the company is “all in” on the roll out of Disney+ and overall transition of its traditional media revenue sources to streaming.  The new streaming services are losing money now and likely will for another few years.  The traditional media businesses including ESPN and ABC produce high free cash flow but are barely growing and in danger of slow secular decline.  Theme parks and the film studio remain strong businesses worth a premium valuation.

Disney reported its December 2019 quarter (1Q20) earlier this week.  Northlake’s takeaway is positive with improved outlooks for streaming and theme parks offsetting continuing challenges for ESPN and ABC and a tough comparison at the film studio in 2020 after the massive 2019 that included the latest installments in the Avenger’s, Lion King, Star Wars, and Frozen franchises.  Key to the results was disclosure of 28.6 million paying subscribers for Disney+ at a better than expected monthly ARPU.  Subscribers and ARPU at ESPN+ and Hulu were also better than expected.  Management added comments noting that churn has also been manageable indicating that the wrap up of The Mandalorian did not lead to cancelled subscriptions as investors had feared.  There was also good news at domestic theme parks where attendance rebounded as new attractions opened.  Wall Street is giving Disney a pass on lost profits at the Hong Kong and Shanghai parks related to protests and the coronavirus.

When Disney held its analyst day for Disney+, management guided to 60-90 million subscribers in 2024 at which point the service would be profitable.  It now appears the low end of the range could be reached in late 2020 or 2021.  In March, Disney+ will roll out to a similar number of households in Europe as the service is already available.  The combination or more subscribers sooner, initially higher ARPU and lower churn than expected, and management comments that there is no change to the expected investment in the service strongly suggests profitability will be reached well ahead of 2024.  This is a major positive for DIS shares as it improves confidence in placing a big value on the projected revenue of the streaming services.

With theme parks performing well excluding the issues in Hong Kong and Shanghai and the film studio in good shape thanks to the Marvel, Star Wars, Pixar, and Disney franchises, the path is clear for DIS shares to resume their rally. Last quarter’s note on DIS indicated that we thought the shares could be comfortably valued at $150.  The good initial news on Disney+ and the other streaming services increases our confidence in the $150 value and argue for a meaningfully higher target to develop.

DIS is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.  DIS is a net long position in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.