Can Movies Drive Disney’s Revenue Growth In Future?

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Walt Disney

With the resounding success of Star Wars, which was released late last year, Disney‘s (NYSE:DIS) Studios division has had a great start to 2016.  Released in early 2016, Zootopia  surpassed the $ 900 million mark at the global box office in April this year and became the highest grossing March release of all time in the U.S. In addition, Disney’s recently released live action remake, a new version of The Jungle Book, earned a world-wide gross of nearly $ 240 million  within weeks of its release by performing particularly well in China and India.  Following the success of this live action adaptation, the company now has a long pipeline of live action fairy tales including a sequel to The Jungle Book, a Tinker Bell project and a 101 Dalmatians spin off. The successes of these releases are timely, given the state of other parts of the business.  As its ESPN channels face a decline in subscribers with the rise of digital video platforms and increased cord-cutting, these box office successes, in our view, can mitigate these losses to some extent and drive revenue growth for the company in the coming years.

Increase In Global Box Office Market Share Can Compensate ESPN Subscriber Losses To Some Extent  

According to our estimates, Disney’s Studio segment accounts for more than 15% of the company’s valuation.  We expect its global box office market share to increase steadily and reach around 14% by the end of our forecast period on the continued success of its animation unit. However, given the success of its live action adaptations thus far, and the pipeline of pending  fairy tale adaptations in particular, there is modest upside, if the company is able to 16% market share by the end of our forecast period.

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This upside can compensate the downside to our price estimate to some extent, if: 1) the company loses ESPN subscribers at a faster rate we estimate; and, 2) the growth of ESPN fee per subscriber is slower compared to our present estimates.

Disney is increasing the focus on its movies division. The company recently announced a partnership with Nokia Technologies to help explore the creation of virtual reality (VR) content for its theatrical releases. The company used Nokia’s Ozo VR camera for two recent pieces as part of the promotional campaign for The Jungle Book.  Disney believes that it can use VR technology to create content which can bring extraordinary experiences to audiences around the world.  Disney’s studios division appears to be on a roll the with continued success of its movies and its focus on content.  We believe ESPN and Parks and Resorts are the two key segments which will impact the valuation of the company the most, as they together account for more than 50% of Disney’s valuation, according to our estimates. An increase in box office market share can partly compensate for ESPN subscriber losses.  Moreover, movies should drive revenues for the company in coming years.  Accordingly, we believe an increased focus to retain ESPN subscribers is critical for Disney’s valuation.

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