Disney: Star Wars Presence At Infinity 3.0 May Be Enough To Revive Video Game Sales, But Significant Growth Unlikely

Disney (NYSE:DIS) last month released Infinity 3.0 priced at $64.99 for a starter pack.  The Infinity game series has seen tremendous success since it was first launched in August 2013. It helped revive Disney’s loss making Interactive Media division. Now with the Star Wars presence in its 3rd generation, there is a lot of buzz around the video game. What is important for Disney is the video game sales. In the June quarter Disney witnessed a decline in unit sales, which weighed on the segment’s top line as well as operating income. ^[1] However, Infinity’s overall positive trend and Star Wars brand image may just be enough for Disney to revive the sales.

Disney’s Infinity game series is similar to Skylanders and uses collectible figurines that are blended within the game, allowing characters from Disney, Pixar, Marvel and now Star Wars to interact and go on adventures. While Skylanders has generated more than $3 billion in revenues since its launch in October 2011, with 250 million toy units sold, Disney’s Infinity is a relatively new game that has still managed to clock over $1 billion in revenues. ^{[2] [3]} Disney’s strong intellectual property portfolio has boosted Infinity’s popularity. And now the arrival of Star Wars ups the ante in a competitive market. Star Wars is a very popular brand and the new movie in the series is highly anticipated. Moreover, Disney will bring a handful of sequels in this series in the coming years. Accordingly, demand for its video game is likely to grow in the near term.   (Also see – Disney Lowers FY 16 Guidance, Though Star Wars And Shanghai Are Key Factors To Driving Future Growth.)

Disney’s troubled Interactive Media unit had seen considerable losses before the launch of Infinity. While the segment revenues hovered around $900 million, the operating income remained negative till 2012. ^[1] However, the revenues saw a rapid growth since the launch of Infinity and jumped to $1.3 billion with EBITDA of around $200 million for calendar year 2014, according to our estimates. We expect it to continue this trajectory primarily due to the Disney’s wide portfolio of characters that it can bring into the Infinity game. Growth in the global video game industry will further aid the revenues. Overall industry revenue is expected to grow from $83.6 billion in 2014 to $107 billion in 2017, according to a research by Newzoo. ^[4]

Having said that, there is stiff competition in the market with Skylanders and now Amiibo. Also, the physical sales of video game products is facing a massive threat from the changing landscape in the industry. With the advent of digitalization in gaming, more gamers are opting for downloadable content. As a result, the physical sale of video game products is witnessing a gradual decline. Owing to these factors, we currently estimate Interactive Media’s revenues will be around $1.85 billion by the end of our forecast period (towards 2022). An estimated EBITDA margin of 22% will translate into EBITDA of over $400 million, representing a little over 1% of the company-wide EBITDA. Given the low value contribution to Disney, a higher than expected growth at the interactive media segment will not have a significant impact on Disney’s stock price.

• Trefis has a $119 price estimate for Disney’s shares, translating into a $200 billion market cap. This is around 15% above the market price of around $103.
• We estimate the company’s 2015 revenues to be around $52.60 billion for earnings per share of $5.00, in line with the consensus, according to Reuters.

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1. Disney’s SEC Filings [↩] [↩]
2. Activision unveils Skylanders Battlecast free-to-play mobile card game, VentureBeat, Aug 18, 2015 [↩]
3. Disney is launching the first toys-to-life ‘Star Wars’ game this fall, Fortune, June 5, 2015 [↩]
4. Worldwide video games market will grow 9.4 percent this year, says report, Polygon, Apr 22, 2015 [↩]