Summary
- Disney announced a major reorganization of its business on October 12, and its market value has already received a boost reflecting optimism among the investing community.
- Disney's lack of focus on growth made me err on the side of caution earlier this year when the stock collapsed, but things have dramatically changed with this decision.
- The going will be tough for Disney in the coming quarters, and a pullback of the stock price is also likely.
- Regardless of this possibility, I went long on Disney as the streaming business will add multi-billion dollars to the market value of the company even under conservative assumptions.
The Walt Disney Company (DIS) announced a major reorganization of its business on October 12 to prioritize Disney+ and content streaming with immediate effect. Disney, arguably, might never be the same. How Mr. Market values Disney, on the other hand, could change dramatically in the coming months as a result of these newly implemented changes at the company level. A closer look at these changes and the outlook for the company as a streaming giant paints an optimistic view of what the future holds for investors, and this prompted me to turn bullish on Disney for the first time in a while.
Dan Loeb's letter
Third Point Capital CEO Dan Loeb, a well-known activist investor who has a history of pushing companies to change for the better, sent a 6-page letter addressed to Disney CEO Robert Chapek on October 7, requesting the latter to take immediate actions to prioritize Disney+ and its overall streaming business. He went on to suggest that Disney should permanently suspend the dividend to save $3 billion annually which could be used to produce original content for distribution on Disney+. In doing so, Loeb believes Disney would be able to increase the wealth of growth-oriented investors in the long run even though revenue and earnings might take a hit in the current period. The below is a summary of the benefits Disney might enjoy according to the guru.
- Rich content will attract high life-time-value subscribers to the platform, which would create billions of dollars in value for shareholders in the long run.
- More content would lead to a lower monthly churn rate than the 5% churn reported by Disney+ at present. This will translate into millions of dollars in incremental revenue.
- Increased pricing power resulting from Disney's ability to compete with Netflix Inc. (NFLX), the industry leader.
- Differentiation from traditional media companies.
- A valuation premium to reflect the growth prospects in the OTT industry.
Focusing on the right strategy is key to a company's continued success, and this letter serves as a reminder for Disney to take bold decisions to secure future earnings.
