Marvel Characters In Disney’s Infinity 2.0 Will Aid The Interactive Media Revenue Growth

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Disney (NYSE:DIS) released Infinity 2.0 on September 23 priced at $74.99 for starter pack and $13.99 – $34.99 for additional characters. The first version of Infinity was released in August last year and the game has seen tremendous success since. It was the 10th best-selling new physical game at retail in the U.S. last year. [1] The first edition of the game has generated over $500 million from the sale of more than 3 million starter packs and the second version may repeat the success as it will now feature Marvel’s superheroes for the first time.

Disney Infinity is part of the interactive media division, which is involved in developing and distributing video games and related content.  The division has been struggling in the past few years due to the poor performance of its releases. However, Infinity’s positive trend might help Disney to turnaround the unit which, until recently, has been posting losses.

The interactive media division generated revenues of $1.18 billion in 2013. The estimated segment EBITDA margin of 15% translates into EBITDA of $177 million, representing a little over 1% of Disney’s overall EBITDA for 2013.

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How Is Infinity Trending?

Disney’s Infinity is similar to Activision Blizzard’s (NASDAQ:ATVI) Skylanders and uses collectible figurines that are blended within the game, allowing characters from Disney, Pixar, and now Marvel to interact and go on adventures. While Skylanders has generated more than $2 billion in revenues since its launch in October 2011 with 175 million toy units sold, Disney’s Infinity is a relatively new game and so far the sales figures look encouraging. [2] What worked for Disney with Infinity was its ability to leverage the company’s strong intellectual property portfolio (including The Incredibles, Pirates of the Caribbean and Toy Story) to boost popularity. And now the arrival of Marvel superheroes such as Spider-Man and Captain America ups the ante in a competitive market.

Disney’s troubled Interactive Media unit has seen considerable losses in the past few years. The segment revenues grew from $0.76 billion to $0.86 billion between 2008 and 2012. [3] However, the revenues saw a rapid growth since the launch of Infinity last year and jumped more than 40% in the past three quarters. The operating income during the same period was $98 million as compared to a loss of $103 million in the prior year period. [3] We estimate interactive media’s revenues to be northward of $2.5 billion by the end of our forecast period, primarily due to the continued strength of Infinity. A growth in the global video game industry will further aid the revenues. Overall industry revenue is expected to go from $68 billion in 2013 to $96 billion in 2018, according to a report by DFC Intelligence. [4] Research firm TechNavio also gave a similar target with average growth rate of 8.3% over the period 2013 to 2018. [5]

We estimate revenues of about $48.4 billion for Disney in 2014, with EPS of $4.00, which is in line with the market consensus of $3.87-$4.27, compiled by Thomson Reuters. We currently have a $94 price estimate for Disney, which is more than 5% ahead of the current market price.

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Notes:
  1. A toy story: Disney Infinity is making more money than Skylanders, Venture Beat, Apr 30, 2014 []
  2. Activision Blizzard’s (ATVI) CEO Michael Morhaime on Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, May 6, 2014 []
  3. Disney’s SEC Filings [] []
  4. DFC Intelligence Forecasts Global Video Game Industry to Reach $96B in 2018, DFC Intelligence, Feb 12, 2014 []
  5. Global Video Game Market 2014-2018, TechNavio, Sep 17, 2014 []