Is Walt Disney a FinTech?
Is Walt Disney a FinTech?
As COVID-19 hit the world, The Walt Disney Company was no stranger to the impact of this global pandemic.
I was curious as to how this fortune 500 company pivoted its services and products in reaction to such a surprising turn of events. And moreover, is Walt Disney a FinTech firm?
I focused my research on the U.S. changes that The Walt Disney Company (DIS) made. This research analyzes specific risks and changes that occurred related to the pandemic.
In 2019 and 2020 DIS comprises a few main sectors: Direct-to-Consumer and International, Parks, Experiences and Products, Studio Entertainment, and Media Networks. The direct-to-consumer and international segment consists largely of their digital subscription services and streaming. The Disney parks, experiences, and products segment includes the theme parks, cruise lines, resorts, consumer products, and licensing of intellectual property. The Studio Entertainment and Media Networks is largely film and television production and distribution. In 2021 Disney changed its segments into two: Disney Parks, Experiences and Products and Disney Media and Entertainment Distribution. Below is a chart of the percentage of total revenue each of the segments provided to the company from years 2012-2021. As can be seen Parks and Resorts was a steady part of their revenue for a long time, but the emphasis has switched to more focus on the media and entertainment, outside of parks, experiences, and products. In my opinion, to consolidate more of the segments into two is less transparent and not reassuring for users of the financial statements.
Before March 2020 in the United States there were closures overseas that Disney already began to feel financially, like closing their Shanghai Disney Resort in January 2020. I found analyzing the company’s financials to be helpful when split along the segments. Below I will share the major ways COVID-19 impacted each segment.
The Disney Media and Entertainment Distribution was impacted in both good and bad ways, the “good” largely related to subscription video-on-demand services (which I will get more into with the direct-to-consumer segment). There were more “bad” results that came to this segment due to COVID-19. Production was shut down impacting the release dates on several film and television projects. With production slowing then there was further delay for revenues from these productions. Another large impact was the closure of movie theaters that is still slowly coming back. After the release of Black Widow on Disney+ and in theaters, there was push-back on releasing movies as streaming along-side movie theater releases. Disney stated in a recent earnings call that they are going to be releasing their films exclusively in theaters before moving them over to be available on streaming services.
The segment that was hit the hardest was the Disney Parks, Experiences, and Products. Due to large periods of time with the parks closed, this segment was no longer receiving revenues from park ticket admissions or any sales of food or items within the parks. Another major area that was shut down included in this segment was their cruise line and guided tours, they were
entirely shut down and began to trickle back into action in August 2021. With the lock-down and lack of travel there were less populations using the spa, resorts and vacation locations that are also within this segment.
The Disney Direct-to-Consumer segment benefitted the most from the major COVID-19 lockdowns. Disney+ was launched in 2019. DIS acquired large parts of the 21st Century Fox Company in 2019 for $71.3 billion. The acquisition expanded the number and variety of titles they would have available to viewers. Along with this acquisition can 30% ownership of Hulu, which Disney already owned about a 3rd of previously, making it so that they now are able to consolidate Hulu’s financials with their own. An area of this segment that suffered during the pandemic was ESPN+ because there were no more live professional sports airing.
Over the pandemic the spread of what percentage of revenues were contributed by each segment shifted substantially. In 2019 Parks contributed 36.7%, in 2020 it contributed 23.1% (since 2013, the lowest it has contributed until then was 28.8%). Most of that change shifted over to the Direct-to-Consumer segment and a few percentage points to the Media segment. This is more evidence of the substantial impact of COVID-19 on the Parks, Experiences, and Products segment.
In 2020 DIS experienced the first net loss that they have had since at least 2006. DIS estimated in their 2020 10-k that they had a net loss of $7.4 billion due directly to COVID-19. As they began to return from the pandemic, they made a few changes to their systems beyond solely restructuring their segments. In attempts to create even better park going experiences they created a new annual passholder system called the Magic Key program. This was said to be based on consumer feedback and information gathered from the previous annual passholder system. In a recent earnings call DIS said that the Dream Key (the highest of their four tiers
available) sold out in two months, the second highest tier is currently sold out, and 40% of their Magic Key holders were new annual passholders. They made reservations and limits on how many reservations can be held at once. This system provides some crowd control which is in line with pandemic needs. They also introduced (outside the U.S. but coming to the U.S. soon) the Genie plus system which is the evolution of the fast pass system they previously had. Guests can pay an additional $15 per person, per day to have access to Genie plus to access Lightning Lanes for up to two rises per day.
There were investments in the building and improving rides and experiences throughout the parks during the closures. In 2019-2021 DIS has borrowed more than in the previous years, 38.1B, 52.9B, and 48.5B respectively. Between 2008-2018 they had borrowed an average of 13.2B per year. DIS’s payables turnover ratio has been generally decreasing over the years as it has borrowed more, currently at a 3.7. During the pandemic they made sure to have more cash on hand, increasing both their current and quick ratios to 1.2 as opposed to 0.8 and 0.7 respectively (rising from a low of 0.7 back in 2017). There were definite unknowns to account for and the company was making sure to cover their bases.
As parks and other areas of their company ceased to operate DIS furloughed over 120,000 employees of their roughly 203,000 total employees. In their 2020 10-k they predicted to have to terminate 32,000 employees in early 2021, I was not able to find the exact number of people that
were laid off (this was a prediction at the time of the 2020 10-k). The estimate of employees in 2021 is 190,000, so the layoffs may have been fewer than expected or more new people were hired post the termination of previous employees. This increased how much revenue per employee that DIS made in 2020 to $320,813, up from $311,143 and $295,866 the previous two years.
In 2020 their enterprise value over EBIT ratio skyrocketed, from 24.5 in 2019 to 79.1. This is not a good sign to investors as they look at the health of a company. Their enterprise value over EBITDA went from 18.1 in 2019 to 31.7 in 2020. There were large changes regarding goodwill, amortization, and depreciation in 2019 with the acquisition of the 21st Century Fox Company. The increased ratios can signal to investors and creditors that the company is overvalued. Of course, the investors and creditors will keep in mind the huge transition that the world was in as the pandemic hit so unexpectedly hard. The number is still hard for investors to overlook and can potentially hurt their numbers in at least the short term as investors wait to see how DIS will adjust easing back after the pandemic. When comparing Disney’s EV/EBIT ratio to other comparable companies (which are hard to entirely find since it is involved in quite a lot) their 90.42x compared to Alphabet’s 25.78x, Netflix’s 43.47x, and Comcast’s 15.88x is very outrageous. The numbers are a little tamer when considering EV/EBITDA numbers at 37.57x compared to an average 15.67x, but these numbers strongly suggest that Disney is overvalued.
It is interesting to pair the numbers saying that the stock is overvalued with what analysts are suggesting simultaneously. Analysts on FactSet have all said to buy or hold (33% saying to hold, the other 66% saying to buy), none have said to sell. The average rating is that it is overweight, indicating that they believe it will perform better in the future. Given that the ratios don’t look great there is some discretion and judgment going into this rating from the analysts.
They have had a lowering ROA and asset turnover since 2019. This is also not a great sign for an investor. It can in part be explained through the large acquisition in 2019. As they move forward, they need to make sure to make the best use of all their newly acquired assets, as of now it is still not looking great, but they have had COVID-19 at the same time to navigate so I think investors may be waiting to see what comes next. Their ROE decreased from 2018 to 2019
and was negative in 2020 due to the net loss. As all these changes have been happening there has also been a change in CEOs that is worth mentioning. Bob Iger stepped down in February 2020 (post some of the beginning rumblings of COVID-19 and after the large moves in 2019 of increased borrowings and the large acquisition) to head the board and will now be leaving the company at the end of 2021. There are a few other leaders leaving the company by the end of the year as well. These are not great signs, but change is happening so it will be interesting to see how Disney adjusts to both the decisions it has made and the conditions of the places they work in (with different political powers having the control to close large arms of their revenues).
Gross margins went from being in the low 40s to 24.5 in 2020 and 25.6 in 2021. As can be seen in the graph below it took 2-3 years for Disney to recover from the previous 2008 recession. The pandemic was not the same situation and hit them differently, but it may be a slow return unless their segments like the Direct-to-Consumer grow to be more profitable than they are currently.
In comparing DIS to the S&P 500 the beta of DIS largely stays at around 1, with the five year average being 0.97, one year 0.95, and the 90-day average now being 1.06. There isn’t a large increase in volatility, but this is not the greatest season that they have seen. As the general market continued to thrive, Disney’s returns suffered during the pandemic. The price changes have not fluctuated as much as they did in 2020 except for this November 2021, with a 14.3% decrease only surpassed by decreases in February and March 2020 of 14.9% and 17.9% respectively and 15.1% in August 2015 in the past ten years. Again, this is not a great sign for the company. Investors are stepping away from the company, time will tell how effectively Disney will make needed changes to return to thriving.
The Walt Disney Company was making large changes individually before the world was struck by such a traumatic change through the pandemic. With both internal and external factors that were not tried in the company’s history there is much in the air in terms of how they will continue forward. They have a different CEO, made a large acquisition shifting the focus even more deliberately towards digital entertainment, have taken on more debt and have some poor ratio analysis reflecting some need for caution on the parts of the users of the financials, but they are still held favorably by analysts and the masses. Time will tell what is to happen with DIS, but as many seem to suspect they have brighter days coming soon. As such I would recommend buying while the price is low if you have time to wait out the growing pains. It may be a slow build, but it isn’t likely they are going away anytime soon.
References
The Walt Disney Company. (2021, October 2). Form 10-K. Retrieved from http://www.sec.gov/edgar.shtml. The Walt Disney Company. (2020, October 3). Form 10-K. Retrieved from http://www.sec.gov/edgar.shtml.
Is Walt Disney a FinTech?
