Chit Chat Stocks - Disney (DIS) | Not So Deep Dive

Episode Date: August 16, 2022

Disney, in short, operates as a worldwide entertainment company. It would be rare to find someone who hasn't heard of the brand. The Walt Disney Company was founded in 1923 in Los Angeles, California. Listen closely as Brad, Brett, and Ryan go through the history, financials, and future prospects of Disney. Enjoy the show! Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Contact us: [e-mail] Timestamps Company Background | (3:03) Industry | (12:00) Management & Ownership | (16:30) Earnings | (20:09) Balance Sheet | (25:35) Valuation | (27:40) Our Analysis | (29:13) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now, please enjoy this episode. Welcome in. This is the Tuesday Not So Deep Dive episode on Chit Chat Money. If you are listening to this, that means you are a subscriber to CCM Plus. Our Not So Deep Dive episodes are solely

for CCM Plus subscribers. So thank you for signing up. If you're subscribed through anywhere besides Apple Podcasts, we should have given you access to our Substack and Google Drive. If you don't have access to that, you should check your spam folder. And if not, email us at chitchatmoneypodcast at gmail.com. Yeah, we've been getting a lot of emails. And the link is in the show notes. And then if you're on Apple Podcasts, please email us at chitchatmoneypodcast at gmail.com. We'll give you access to all the written research that comes along with the subscription. But either way, thank you for signing up. CCM Plus, it's been fun as the first subscribers joining us because we have started for about a month here. But today we're going to be talking about Disney.

We have Brad Freeman joining us the show today. Brad, this was your choice. I have to ask, Disney is a well-known company, I think known by basically everyone, but they're in a bit of a transitional period. So is that why you chose them for the show this week? Yeah. So part of part of the investing process for me is finding these bellwethers like a PayPal or like a meta platforms that are kind of undergoing and meta I've owned for a long time. So PayPal is probably a better example, just kind of undergoing makeovers and transformations and philosophy changes that people aren't really believing in and giving them credit for. And just figuring out which ones I think have the highest probability of success. And then I do believe in the most

and in terms of Disney and all the money they're spending on streaming. And I guess that last quarter that they just had, which I'm sure we'll talk about, was a positive data point. I think people are a little hesitant about them kind of carving this niche in a streaming world that's getting wildly competitive and being entered by every single deep-pocketed mega cap in the world. And so I wanted to learn more to see if I believe in this, because if it does work out and if they do become this streaming dominator, I think there's a lot to like here. But I'm sure we'll talk a lot more about the probability of that actually happening or how it could happen. Yeah, that's a great tease for the discussion we'll have later in the show. I'm sure we're

going to talk about profitability, the parks and products segment, profitability, or really potential profitability of streaming. But Ryan, why don't you introduce Disney? A lot of people know their history, but I'm sure you're going to give a brief history there. And there are two large segments, media and parks and experiences. Sure. So Disney is put simply an entertainment company and they generate revenue, obviously a ton of different ways and kind of at the center of it or what's tying it all together is the storytelling and the intellectual property. And so there is these, there's obviously synergies between the films and then the parks and the cruise lines and the, you know, they have plays at the cruise lines of films that they've made 30 years ago. So it's like, there's tons of synergies and they're all pretty much built around storytelling. And so Disney breaks up its business into two segments that are comprised of their own sub segments. But the first one is a DMED is the abbreviation. It's digital media and entertainment distribution. Basically, it's the linear networks, direct to consumer, which is where they're plowing a lot of their resources right now, and then content sales and licensing.

so linear networks that includes channels like abc disney espn and then a lot of these have their own sort of sub channels so espn you espn 2 espn plus or espn news all that stuff yeah that's huge they have the excel competition is that a real is espn the outro a real thing or is that they they were fake in dodgeball but then they made a real thing for like the real sub categories like the excel world championships interesting okay and then they have like National Geographic as well. And they generate revenue on these primarily through affiliate fees from multi-channel distributors. So think like the cable providers paid to get ESPN as a part of their bundle.

And then advertising as well on those channels. And then the second segment, that's their DTC or direct-to-consumer segment. That owns several streaming channels. Most people are probably familiar with it, especially if you are looking into Disney today as an investment. It's Disney+, ESPN+, Hulu, Disney+, Hotstar, and Star+. Hotstar and Star+, I believe they're two Indian streaming channels. Yeah, that's a well-known anecdote with us. Yeah, we don't have a lot of experience with that, but they are profitable.

or prob no not profitable they are popular in their uh specific market which i believe is just india i could be getting that wrong and then the last one is the content sales and licensing this consists of fees paid to third party paid by third party services to offer disney's film and tv productions to their own customers so um think like netflix airing a disney movie um that that's basically what's comprised here and then it's worth noting here that disney is slowly removing a lot of its content from, or a lot of its library from third-party services because it's trying to bring everything in-house. So this should, unless I'm wrong, I'm thinking about it, should be a dwindling revenue source over time or a smaller percentage of the overall pie for Disney.

And then the last thing on the media and entertainment, it also includes theaters paying Disney for distribution, pay-per-view products, and then licensing to stage plays. there's a whole bunch of little ancillary ways they can generate revenue and then the second segment is disney parks experiences and products or dpep and it accounts for all the revenue generated by the theme parks the resorts the cruise lines and there's like other true like physical experiences that people can pay for and then there's consumer product sales as well so the theme parks resorts they have resorts that are well they have parks that are paired with hotels and resorts all around the world so there's most people know these disney world disneyland

california disneyland paris hong kong and shanghai resorts which they technically only own a little under 50 of each of those but they get consolidated into their operating income and then the revenue that that they generate there are theme park admissions as well as merchandise sales food and beverage sales room nights at the hotels and some other smaller ways as well Then they have the cruise lines, very similar to the theme parks in terms of monetization. And then the consumer products, this includes sale from their own Disney stores, sales from their own Disney websites, and wholesale channels. Also, so I have a friend's dad who has a manufacturing business where they build toys essentially on behalf of Disney. They get royalty rights or royalty fees from those kinds of manufacturers to

sell Disney goods. So that's included there as well. I think that covers the basics of the business pretty much. Do you know, this is a small part of the business, but do you know where video game licensing is? I'm not sure what. I assume that would be content sales and licensing in the digital media and entertainment segment. Okay. That's my assumption, but there's so much like, I mean, the big thing is just streaming and are streaming and linear networks plus

parks. That's the big things. And there's a lot of other smaller ones. Yeah. I guess consumer products is pretty big, but parks is kind of the big profit driver for that. Yeah. And yeah. And consumer products are typically sold at the parks and they're, you know, kind of, there's, there's, they're all tied in together. Yeah, exactly. But I'll go into the history because this is obviously a historic business and one that's fun to read about. So it was the early 1920s. Walt Disney had created or founded a film studio in Kansas City.

They created a short film called Alice's Wonderland. It did not do very well. And so the studio had to file for bankruptcy. However, in the bankruptcy, they sold the rights to the film to a New York distributor named Margaret Winkler, and they distributed it. And shortly after, it became a really big hit. And so they signed Disney to a contract for six Alice comedies. And so Walt Disney and his brother Roy paired up in Hollywood to build Walt Disney Brothers Studios, or not Walt Disney, Disney Brothers Studios.

And that was sort of the genesis for what now has become the modern Walt Disney Company. And then from the 1930s on, they obviously had a ton of animation films that did really well. And then in 1952, Walt kind of had his first idea for what would eventually become Disneyland. roy was not the he wasn't totally on board with this so it was kind of walt's own thing at the time and that's why um when disney he was really the one that pushed the parks and believed this could really be something and i mean this is kind of like one of the greatest entrepreneurial stories of all time i think and it's like one where intuition played a huge part in it because roy was against it and that's why it ended up becoming the walt disney world specifically and

not the Disney Brothers or Disney World, that kind of thing. So anyway, the park officially opened in 1955. At the time, it cost $1 to get into the park. Guests had to pay additional rides, but needless to say, they've raised prices since. And then they were expecting around 11,000 people the first day, 28,000 people showed up. It was a huge success. And they parlayed that into a ton of success with other parks as well. And then in 1966, Walt Disney did pass away.

Shortly after, Roy, his brother, became the first CEO of Disney, and I'll kind of go through some of the important successors, but after Roy's death, there are basically two that I think are worth noting. uh michael eisner and bob eiger so eisner assumed the role of ceo in 1984 after his time of uh as president of paramount pictures and he was largely responsible for disney's push into the television industry um which is kind of you know you know they have i mean that's a huge segment of their business now the linear network so uh kind of kind of the the person behind that and then eisner passed the torch on to Bob Iger. And Iger, there's some dispute around, I guess some people think he had his faults. He's kind of a little bit of a controversial figure, but he did three deals that were essential into what Disney became today. And that was acquiring Pixar from Steve Jobs in 2006

for seven and a half billion, acquired full control of Marvel for 4 billion in 2009 and acquired Lucasfilm for $4 billion in 2012. That is a huge component of the streaming value prop today. And the expansion of the parts. Yeah, that as well. And so it's been a big driver of the success. And so for any faults that he had, he made three really critical deals that have been highly successful. And now Bob Chapek is the CEO, but I'm going to leave that to Brad to discuss. Brett, you want to touch on the industry and competition? Yeah, pretty easy one, I think, since it's important for the streaming side. Yeah, it's an easy one to see, like everyone kind of knows because you're touching, you know, all the different things as a consumer.

But the global entertainment and media industry is estimated to be a touch over two trillion dollars and is expected to steadily grow this decade. I think it's steadily grown over multiple decades as people in richer Western nations and more Eastern nations, too, have gotten richer and more free time. I think it's probably the best way to put it. But let's go to the two most important categories, which I would say are video streaming and the global amusement park industry. So the video streaming market is estimated to be about $80 billion in 2022, and then it's going to steadily grow to $139 billion by 2027. As we all know, streaming video penetration is slowly killing broadcast and cable. I'm not sure when the final nail will be put into the coffin, but I don't know. Place your bets could be sometime this decade, might not be for 20 years, but streaming is slowly gaining share. We've seen the charts all over the place.

Now, the global amusement park industry, which Disney dominates, was estimated to be about $73.5 billion in 2019. That is pre-pandemic, so that's why I used that number. Now, if we look at competitors in streaming video, you'd probably maybe put two different categories. There'd be sports streamers and traditional streamers that are just kind of doing dramas, comedies, reality TV. There's Netflix, which we all know, HBO Discovery, Amazon, and Apple. Now, Amazon and Apple are heavily getting into sports, or maybe not heavily, they're dipping their toe. They might get heavily into sports rights in the future.

So we'll probably discuss that as a threat or new competitors to ESPN. Now, if we're looking at theme parks, the biggest competitor would probably be Universal Studios, then Six Flags, SeaWorld. There are a lot of traditional theme parks out there that are quite smaller. But like we've talked about, Disneyland is the only one with Marvel characters, Mickey Mouse, all that good stuff. All right. I'm going to throw this question out there now because I think it's pertinent to the competition segment. You have to pick three streaming services. You only get three for the next, let's say, five years. Which are you going with? Let's start with Brad.

Well, OK, is Amazon Prime you got to buy yourself or what? because uh yeah you have to buy it okay brad good and that is do do i get if i pick disney plus do i also get hulu and espn or no you can you can choose the bundle oh okay that so that bundle and i don't i don't own it yet but i mean with how quickly they're moving sports content over to disney it's only a matter or to their streaming it's only a matter time before i do and then um netflix i still think has like the best entertainment content and and all that good stuff and then uh hbo max has such better content than paramount but paramount's gonna have such better sports rates than hbo max it's like i don't know

i forgot paramount they're getting their they have the sports a little bit they're a little smaller but yeah yeah i'd go with paramount because i want that i want march madness and I want, like, all that stuff. Like, I need to watch that. So I'll go with that. All right. I would go probably have to choose the Disney bundle just because you're just getting three and one there. This might be a little bit cheating.

But ESPN Plus, yeah, in the same regard, if they move all the stuff like college football over there, I'll have to get it. Probably then go HBO. And then it depends where the sports rights fall, which I guess is an unknown here. But I'd probably go Apple I like their shows better Really? Netflix doesn't make the cut, huh? Nah, I haven't watched it in a long time

Really, so Alright Ryan, what's your choice? I think I'm going to go with the bundle I mean, ESPN Plus It really I mean, sports rights is like its own It's always such a difficult

It's a monopoly, but with high cost Yeah, it's a difficult thing to analyze But ESPN Plus, for me They have all the MLS games, basically And I watch that all the time so uh yeah i'd pay for that outright but uh since i'll get it in the bundle i will take that i will also take netflix and hbo max all right yeah hbo hbo max okay brad let's move to management and ownership really old industry or sorry company so i don't know if the founder the founder ownership

is really relevant here since he's dead but why don't you yeah the founders are no longer involved in the company. It's been a little while. So ownership team has changed hands, I mean, several times. So, I mean, we've done this with other companies like Stryker. That's another good one where they're a generational company where insider ownership, actually Stryker might've had a lot of, nevermind, that might not be a good example, but insider ownership here is very small. So insiders together own 0.15% of the company. That's directly in shares outstanding. Iger owns 0.16%, or Insider's own a little bit, about 0.2%. Sorry, I forgot to change that before the show notes. So let me just put it in the newsletter now. But Iger owns the vast majority

of that. JPEG owns a tiny bit of it and will have more because it's interesting to note that his compensation, I mean, it's 90% equity performance incentives and return on invested capital. That's the key metric and the key barometer they're using, which we love to see. So while he owns very little of it outright today. It's very likely, I mean, it's going to happen. That is, his stake and Iger's stake look more similar over time. And then Vanguard is at 8%. BlackRock's at 6.5%. State Street Corp is at 4%. Morgan Stanley at 2%. It's your typical bellwether generational company. Again, very little insider ownership and a ton of institutional ownership. And then In terms of the team, the trend here is another encouraging one.

So, Shay Peck was with Disney for almost 30 years, climbing the ladder before being promoted. He had a job out of college and then started working for Disney. I mean, that's his career trajectory. The CFO, Christine McCarthy, pretty much the same thing. She was climbing the ladder for 20 years before her promotion. She's a board member at Procter & Gamble, just a fun side note. But, I mean, that's the theme. That's the trend here.

You work for Disney for a long, long, long time. you get promoted a lot and eventually you're an executive. There are obviously exceptions to that rule, but that's pretty much the trend. What do you guys think of the difference between a company that likes to bring outsiders in versus a company like Disney that is more insiders? Do you think it's positive? I kind of like the Disney model because, you know, JPEG really probably had a good grasp of the insides of the parks business and stuff like that. Yeah, I think it depends on the business, whether or not someone from the outside could just come in and run it properly. I think with Disney culture, such a big aspect. So grooming any

sort of successors for several years prior seems like it's a big part of it. And reading through Bob Iger's book. Can't seem to do it. Yeah. I mean, but it's been, I guess he's not every single, except for Mike Eisner and maybe I'm wrong on this. I think every single one has been within the company, every single CEO. Yeah. I think that's right. Brad, any, Is that a positive for you when you see something like that? I guess just a bit of nuance, which is, yeah. So I guess for an example that I would use is match group and how Char and I know you guys are familiar with this one, too. And we're both holders. I don't know if you guys still are. So correct me if I'm wrong.

But the execution has been a little lacking. And bringing in Brian Kim from Zynga and EA Sports, who's got really relevant experience and a lot of success with a la carte, which is where I want them to go. I won't talk about match too much because that's not the show, but just when the ship needs to be righted, I kind of like those external hires. But when you have a Disney that's just chugging along like it has been for decades and decades, I think internal makes a lot more sense. Yeah, that totally makes sense. All right, Ryan, why don't you hit recent earnings? No, it's a complicated one, so we're going to have a lot of numbers here, but we'll have some good charts for anyone on the sub stack and the drive.

Yeah, I put some trailing 12-month figures down here, but it's been moving quickly because of the COVID situation and how much of parks is related to international travel and so forth. And since the year-over-year comps are wonky there, pay more attention to the most recent quarter than the trailing 12-month figures. With that said, $81 billion in the last 12 months, that's up just under 30% from the 12 months prior, 34% gross margins, and just under 10% operating margins. Most recent quarter, their total revenue was $21.5 billion. That was up 26% year-over-year. Parks and resorts generated $7.5 billion, up 70%. And then media and entertainment generated $14 billion, up 11%. They had $3.6 billion in operating income.

So that's about a 16.6%, or it's 16%, let's say, operating margins. Parks has 30% operating margins. Media has roughly 1% operating margins. So, or sorry, I may have botched that figure. I think it might have been a little under 10%, sorry. And so Parks really is sort of the operating profit driver for the time being. However, linear networks is quite profitable, but they're losing money currently in the streaming aspect. So they're pouring a lot of their money there.

They would have been probably more profitable on a lower revenue base if they just stuck with the linear networks. And they probably wouldn't have had that would have been concerning for their future. But the transitional period and we'll see what happens because, you know, six months from now, when they raise prices on Disney Plus and the bundle and all that good stuff, what is going to happen? And plus the advertising tier, I'm sure we'll talk about later. Yeah. And it seems like the economics of the streaming model aren't quite proven. It isn't sort of, I would hope, and I think all investors would hope, you're not looking at sort of the steady state economics or the mature state economics.

I would hope so. Yeah. But in terms of the direct-to-consumer offering, here's sort of the subscriber and the revenue per user breakdown. So Disney Plus, which includes Hotstar, has 152 million subscribers globally. That's up 31% year over year. They have $4.35 global ARPU. So average revenue per user, that's up about 5%.

And then ESPN Plus has just under 23 million subs. That's grown 53% over the last year. And they have a $4.55 ARPU. However, they just raised prices, which I don't think was included in this quarter. it must not have been from they literally double prices if i'm not mistaken from 4.99 to 9.99 so there's also a bundle included in that too so some of that back and lower are pretty right and then hulu uh 46.2 million subscribers here almost all of those are for the streaming video offering so not the live tv it's the it there's a mix between hulu ad supporter and and

premium but there's also the live tv offering which is like almost 10 times the price um very few of the subscribers are the live tv um but so excluding live tv about 13 average revenue per user that was actually down from last year so of those three what do you think looks the most promising do you or maybe i'll pose it this way do you see those three services getting integrated more tightly over the coming years uh i don't brad any thoughts on that I, uh, maybe I, I guess I, I do think, and we're talking about ESPN plus versus their, their, their, all their other content and kind of sports versus, um, scripted entertainment. But I really think there's this, there's this just wildly passionate cohort of sports fans

who only want that, um, which I can sort of relate to a little bit personally. And I think just creating that as a standalone option on its own is going to do really well. And then also bundling it's going to do really well. So I think yes to both is my answer. yeah the it'd be interesting to see if they combine hulu and disney plus because of the similarities there although it is slightly different because disney plus is more of those family-friendly stuff uh and the fantasy and uh national geographic and whatever who lose more of the dramas and comedies but it seems like the disney plus will be more important holistically

for the company because it'll drive more let's say okay down the line they want to drive their parks business in india or something after after they really have so many fans there and disney plus will be a good way to lock in all these customers to start loving all their different ip and stuff like that and that's true within the home markets as well but espn plus on its own i think can be the better business um just on its own just because of the exclusivity you get with sports rates? Just one quick correction. The media business has about 10% operating merchants right now. I put 1% of those wrong. So however, it still stands. Linear networks is more profitable than that, and they're losing money in the streaming business

currently. So that's offsetting what would have been stronger profitability. Yeah. All right. Let's move to balance sheet and liquidity, Brad. when west jet first took flight in 1996 the vibes were a bit different people thought denim on denim was peak fashion inline skates were everywhere and two out of three women rocked the rachel while those things stayed in the 90s one thing that hasn't is that fuzzy feeling you get when west jet welcomes you on board here's to west jetting since 96 travel back in time with us and actually travel with us at westjet.com slash 30 years yeah and really i mean very important Part of this conversation, especially, I mean, when you're again competing with Amazon and all these other companies with just so much money to spend and not optimizing for margins, like you need cash on the balance sheet if you want to be able to compete.

And it has that more than pretty much any other legacy media provider, maybe, and not nearly to the extent of these mega cap tech companies, but it's better off than most of the other legacy media providers. But it's got $13 billion in cash and equivalents, $5.5 billion in current debt, another $40 billion in total debt. And I mean, that's really just a product of how wildly steady and consistent of a cash cow these parks have been over the years. I mean, it can afford to really comfortably lever up the balance sheet and spend, which it's done. And I'm sure the last two years of the pandemic has been a little anxiety provoking from them with having all this down in the balance sheet and the parks being shuttered for a little while. but they seem to have come back really strongly and that's great news for the company because that really is

the balance sheet fortifier that they need to continue to compete and to continue to pay for all these rights that they need yeah and it's not even that the debt looks not even that bad for a media company which is funny to say but yeah

was some of that debt Brett maybe you know or Brad you might have seen it acquired in the did they take on some of that debt to finance the 21st century fox deal um i believe that was all stock but again i did not look at the details of that acquisition yeah i'm not sure the i know the share coming up so they definitely use stock in some regard but yeah if you look at the share chart uh but either way that was they have a lot of debt the share gun actually hasn't gone down

although it did go down if we look at the chart from like i'm just going off the top of my head you're like 2014 2018 but after they acquired fox they went back up um so yeah hopefully uh i'll continue in the future but i'll hit valuation um as a note we'll have the dynamic valuation because we know it can change this is based on a stock price of 121.84 cents current enterprise value is approximately 255.7 billion dollars and that leads to a trailing enterprise value to operating income of 49.2 and a trailing enterprise value to free cash flow of 207. Should note, though, that these numbers look bad because of the investments into streaming and the parks haven't really gotten back to their full go yet.

So if we isolated, I mean, I didn't calculate the numbers, but if you isolated the theme parks division and did an enterprise value to operating income solely off of that, it would be, I don't know, like EBIT operating income of like 30. So again, the numbers look wonky right now. Free cashflow is going to look bad. However, that just means that you have to be confident in the continued cashflow of the parks and experiences business, and then the ramp up of the streaming business to continue growing at a high rate. We look at their potentially dilutive securities as a percentage of shares outstanding that has hung out at around 2% for the last five years. So they have a decent amount of dilution coming in. Historically,

they bought back stock although it has paused because of the 21st century 21st century fox acquisition and covid but it's been pretty consistent at about two percent so that would be stock options rsu's stuff like that and as brad mentioned they do use that um when compensating their executive team all right fun stuff anecdotal evidence brad uh or ryan just one quick note before we get to the fun stuff i'm looking at the fox deal right now uh half cash half stock took on $14 billion of net debt, or Disney assumed $14 billion in net debt in the acquisition. So there was part of that debt balance that Brad mentioned was acquired from that. And sizable acquisitions, $71 billion, something like that?

I think so, yeah. All right. Anikdol Evans, Brad, I know everyone's got opinions on this stuff, but what are our thoughts? Yeah. And actually in between this and our next section, I'm going to look back up the goodwill number because i think that's an important number to share here too and i forgot to include that in the balance sheet but um for anecdotal evidence um before i get too distracted so disney had some killer shows growing up i mean i i i think i probably speak for most of our age group that when school ended at 3 or 4 p.m well i would go home and watch maybe seinfeld or friends but but on tbs but then immediately go to disney channel for some hannah montana or from sweet

sweet life of zach and cody i mean it's just it was nostalgia and they have fantastic i mean they fantastic content and they have um and they've delivered it like decade after decade so uh that that is my anecdotal evidence that they have given me a lot of entertainment growing up yeah for the kids they're gonna lock i mean nickelodeon is popular but disney channel and disney in general not just the channel is popular uh ryan what do you got uh well i guess anecdotal evidence on the parks uh there is something kind of magical about them i know that's the whole uh allure um and you're willing to, especially if you're like raising a family, I think you're going to pay whatever it costs to have that experience.

Go into debt, take out a loan, take out a home, take out a loan on your house and go to Disneyland. But no, I mean, it's true. They ought to start, they ought to start offering Disneyland credit. Yeah. Let's get upstarted to that, Brad. But yeah, I mean, there's been no signs of slowing down and they just continually raise prices yeah i think uh i love most pixar films or i used to love them maybe a little bit more i did love the marvel brand it's fallen off a little bit lately um maybe i'm just

getting old and then i like i like star wars they own all those um and then i also on the espn plus i put here that i'd be willing to pay 20 a month purely for espn plus i i wholeheartedly agree like Like they have, yeah, sorry, go ahead. However, they don't have all their stuff on there yet. They are, and this is part of the problem with sports rights in general. They're losing the MLS games here soon to Apple TV. I would not pay more than 10 bucks a month without it. That's not real football, Ryan.

That's like fake football. But here's the point of the sports rights. There is a cohort of fans that like the MLS, whether it's like 5 million. I'm kidding, I'm kidding. Right, and it's the – and so I think this is like a – John Malone said something like this about sports rights, and I know this is about to get into break. He said this about ESPN. Growth opportunity. No, I mean in sports rights in general where he says basically you're buying medium-term contracts, taking the risk of whether or not it's going to be profitable or not.

And then if you do squeak out any profits by the end of it, when you re-up the contract, they take all those. However, he also said ESPN was the great tax on the American people. so yeah there's two you know he said some different things there i don't know it's a tough conundrum though it's a tough nut to crack yeah it's just costly content i guess um did you already go on anecdotal no i just this is a joke here for any of reading it but it plays into the marvel stuff i see previews for like she hulk attorney at law and i kind of think Are they That's like the full name of the movie

Yeah She-Hulk colon Attorney at Law It might be a TV show I really have no idea But I worry about Too much juicing Of the Marvel brand What do you guys think Yeah I think that's a problem

Well first of all Is Attorney at Law redundant Or is that just me That's true that's that's a good point i never thought of that but okay so the only thing that i'll say and and i'll i'll leave out my opinion here on whether i think more woke content is good or bad but um i've been seeing just a lot of anecdotes about kind of these shows sort of catering to more progressive mentalities just totally flaming out in terms of viewership so um and i mean disney

very much there is very much so kind of a cultural a central cultural piece of our of our country so they have to follow these trends and ships but it'd be interesting to see how that kind of translates into into viewership as as different companies kind of do different things and i whatever if it's progressive or not that show just doesn't i mean yeah it's supposed to be like okay look marvel's supposed to have your big like people whatever from the comic books i don't really know much about them and they're pumping out all these different shows that are supposed to be huge either movies or television shows they're supposed to be billion dollar blockbusters and if you're doing like five or six of them a year or maybe even like 10 it just feels weaker

um yeah if you get what i mean because like she returns yeah because if okay for example if the star wars movies back in the 80s this might be going on a tangent we're probably gonna move on but like they came out once every two years and i think they've done that for all the rest of them if they had all three come out in one year people wouldn't it just would have been different right There has to be some sort of anticipation. And I know it's been so successful with Marvel, but you don't see the deterioration until it shows up in the numbers. Like the deterioration within the quality will happen before it shows up in the numbers.

And I'm just worried that that could sneak up on them. However, I mean, it's a phenomenal asset and they can utilize it at the parks and stuff like that, which is just great. Yeah, I don't know how to think about that because maybe, maybe it's just us getting out of the age demographic that it's targeting. maybe uh but or i mean yeah the frequency the frequency though still like people like i mean kids still like nintendo stuff and they do not nearly as um much like a pace all right future growth opportunities i know we've got so many different avenues we can go here but brett yeah i think so mine is super simple just go buy a lot of content that you know

people are going to want to watch i think we're in a land grab right now and they can they have the flexibility to outspend Netflix and Warner Brothers and Paramount and all these legacy media companies. They don't have the capacity to outspend Apple and Amazon. And I think their success is pretty inevitable, but they can separate themselves in terms of building the content library versus pretty much every single other legacy media company in the world. And I think that's really important right now. I know we're in this period of rising rates and diminishing liquidity and extremely hawkish macro and people want profits and they don't want growth and they don't want speculative longer-term projects. But I think it's the right thing to do and leaning

into streaming and just doing what they think is the right thing in the near-term for longer-term success, I think, is probably tough to pallet for a lot of people right now. Again, just wanting near-term cash flows and wanting less speculation. But I think they're in a position to really separate themselves and to build yet another moat. Not build another moat, but transition this um this moat that they've built in linear to streaming really effectively more so effectively than than pretty much everybody else already existing in the space yeah the that's an interesting point because if netflix is kind of frozen right now and i've been able to grow their content spend or i think they said they're not growing it anymore and disney is

able to generate tons of cash from the parks and experiences side they can run d to c at a loss a way you know for way longer than everyone else um is that the right strategy maybe but they have that flexibility um ryan what's yours looks like you have two two all right a little bit of a cheater here but i think it's fair for disney yeah i'm gonna pick one uh the so either a they launch a sports betting app or have some sort of partnership with in the espn brand i think that's like really sort of the logical thing to do um and they know this it's been talked about on the conference calls um they obviously have such a good brand in sports it feels like there has to be a way to leverage that on the betting side maybe like try to buy one of those companies

yeah maybe um i don't know they they said this in the conference call they said we found that basically our sports fans that are under 30 absolutely require this type of utility in the overall portfolio of what ESPN offers. So we think it's important. We're working hard on it, and we hope to have something to announce in the future in terms of a partnership there that will allow us to access that revenue stream. It sounds like maybe they're going to do this with some sort of a third party. Hard to see, but obviously a lot of revenue to be had there. The other one, and this is more speculative, more what I want to personally see, is we've talked about this with alex morris before maybe this convergence between traditional media so uh either streaming

or linear and interactive media in the form of gaming i'd like to see disney acquire a video game publishing studio um they work with ea on several of the brands that's as you mentioned earlier they licensed the star wars brand so ea can make the bat i think it's battlefront or a lot of different ones yeah um but i think they should either acquire them or nintendo i know it doesn't seem i know they're not gonna sell but perfect world i mean that would be the ultimate i mean that would be a trillion dollar company but it's two very loved brands i mean yeah i mean it would be a trillion it would be a yeah it would be amazing if you took nintendo's products and gave disney's ability to choose revenue choose money out of people yeah it would be phenomenal i think

the parks there's the parks element as well um they could kind of combine on the parks efforts ea also works in sports as well so since as the premier sports one i mean there's rumors that ea's was going to get acquired by comcast so they're floating there uh they're sending some birdies out to see yeah i don't know if i think disney would probably have to take on some debt to do it for sure or maybe we're making a stock deal yeah um and some people hate some people don't think the idea of an ea acquisition makes sense but i think those are really durable franchises um and there is i think a lot recently especially the development studios that have been acquired have been sort of aqua hires where it's hard to find development

teams for video games that are really strong and EA's got tons of them. So combo with sports would be great. I mean, if they got it right, I mean, it'd be a hell of a lot better than 21st century Fox, but I guess that would lead into our highlights. I'll talk about mine. We talked about ESPN plus, and that is just my future growth opportunity is bringing all of their sports to streaming. I don't want to list them all out, But if anyone that's a sports fan knows, whatever you watch on ESPN, those are the rights that

Disney has. So college football, some NFL football, MLS, like Ryan mentioned, Formula One, big NBA partnership. But they are in the pole position right now with the growth of ESPN Plus at around 22.8 million subscribers. If we extrapolate out and say at a $15 monthly ARPU, which is just average revenue per user, and that would also include ads, which are always going to be on sports, just because of the breaks and the action at $15 on a monthly ARPU at 75 million subs. That is $17 billion

annual revenue before any, you know, ancillary products like sports betting, like Brian mentioned feels very doable that this could turn into, you know, the revenue outpacing their content content costs there. Uh, so generating positive cashflow. Um, I don't know if you guys have any other thoughts on this one. Is that too optimistic? Is that too pessimistic? Even I know they're not going to charge $20 a month, like Ryan mentioned, but they do have a lot of pricing power with ESPN Plus once they move everything over. I worry about having your value, all the value in your streaming offering tied to sports, because I just don't think there's a lot of profitability there. But who, well, this could be the Amazon and Apple conundrum, and that can

toss a wrench into here but you're not you're not going to go anywhere else because we saw that with the pac-12 for football they tried to do their own thing and they totally failed and espn and fox are pushing them out you don't you think that work is done pretty well does someone does big 10 does the big 10 own big 10 network or who no that is uh i believe that is through fox but this is kind of in the weeds that sounds right yeah sorry about that but i feel like it's a bit of a they need each other now the nfl might be different because there's so there's so many competitive bidders there are more now i mean cbs is not going to be able to to really get up but again i that concern about apple and amazon is warranted those could be those could definitely

throw a wrench in this right brad sorry brad do you have anything i mean the only thing i i i would i would pay a lot of money for espn plus um i mean yeah i i'd pay a lot of money for sports streaming rights and i wouldn't pay that much money for um extra scripted content maybe i think i might be a little bit of an anomaly where you could charge 30 or 40 bucks a month and i'd still probably pay it but um but yeah the and what's interesting is if the tv bundle the cable bundle breaks up and people basically have what 80 to 100 bucks a month freed up that a lot of that could flow into ESPN plus don't say okay let's move on to highlights and low lights Brad what do you have for us yeah so the leadership team I mean it's full of veterans and I hate to sound

redundant but it really is important to me that you've got one executive after another that has been with the company for 20-30 years I mean when I look across my holdings and average 10 years are like four or five years up for upper management. It's just a strength that I really admire from the team. The other thing is, and Brett and Ryan have both given this idea publicly before, which I agree with, is that low margins, so really capital intensive businesses, they're not, I mean, they're not sexy. And they're not, I mean, they're not, they don't excite us because there's not 90% gross margins and 40% even margins. But what there is, is a very large upfront costs associated with building all these content benefits. There's a very large upfront

cost with building and maintaining these parks. And I don't really think it's very easy to emulate. So the highlight here is that I hate the word moat and I don't like to use it a lot, but there's a very clear moat here in terms of what they've built, especially on the park side and also on the content side that I think they're fortifying through a lot of needed investments. The low Israelites, it doesn't seem like Iger and Chapek get along very well. So while the 10 years have been very lengthy, I've heard Chapek hint at him regretting hiring or I've heard Iger hint at regretting hiring Chapek and choosing him. I don't love to hear that. But I mean, it's not the end of the world. They're two very powerful people in media. And it's not all that surprising that they

don't see eye to eye on everything. But and also so just to get to that capital intensive point, And again, the flip side of that is that I don't think cycles of heavy investment will really ever slow down for this company. And I think that is fine considering what they are and who they are and what they've built, but it just needs to be kept in mind that this is not going to be a low CapEx company where you're going to see a ton of operating leverage or anything like that in the legacy business. Yeah, I agree.

And at least Iger's out. Is he totally out? Yeah, he's off the board now. so yeah i guess that's fine but that transition is always a concern uh i guess the egos didn't match all right ryan what do you got for highlights on the lights i think the disney bundle and we all put it in our uh top three is the best overall value in streaming thanks to both the diversity of the offering and just the sheer size of the catalog um so i think there's room to increase prices there probably even double prices over the next five years um and then they basically are

well they did it over one year they did it on a whim uh but they uh i also think the parks are maybe one of the best businesses around that i can think of in terms of durability and being able to generate mark like i think it's 30 operating margins people are traveling literally around the world to come see these things and they continue to pay more and more. Obviously it's CapEx intensive. There's probably a lot of maintenance CapEx included as well as growth CapEx for building out new elements of the park. But it also turns people into lifelong Disney fans.

If you go visit that when you're a kid, those interactions with Disney characters builds affinity for the brand forever. Lowlights for me. And this was something that was brought up. I recommend going and listening to, there was a podcast called Yet Another Value Podcast where our friend Alex Morris went on and he kind of talked about the media landscape overall. And one idea that was posed was this idea of just increasing costs to acquire attention. And it isn't, Disney isn't necessarily just competing with Netflix. They're also competing with video games. uh they're competing with roblox they're competing for time spent and there's so many alternatives today that it's can it's really increasing the cost to attract that attention and so i worry about that going forward obviously yes wonderful ip i'm still going to go to the

theaters when they release really good movies but as you said yeah you saw thor 11 thunder over top gun although i might be i might be changing on that after a few few flops on marvel's part what would you give them b minus instead of like a now or what was i don't really watch those so are they marvel ones yeah not those were c's really that bad yeah thor was pretty bad but anyway the um i just think it's getting really competitive for uh customers time and it's not what it was i think a lot of people are comparing this to the um the onset of linear whatever it was 50 years ago and who's going to be the winners there i think it's very different there's a different competitive landscape here because you're including all that interactive entertainment as

well and then i just have no idea what mature state economics look like for streaming so um and that's where they're allocating tons of resources does that become some sort of a loss later fine that's not the end of the world parks can continue to grow but it's a different investment thesis well yeah then we're gonna see a lower enterprise value for sure all right i'll hit my highest and lowest i think i have a lot of overlap so let's see we'll skip any that i already talked about i mean highlights i don't i mean i guess i'll just reiterate the lock on family offerings plus sports if they have that feel pretty confident they're in their ability to maintain viewership compared to someone like even netflix um as we continue the transition to streaming and

then also compared to other companies that were in the legacy business as they transitioned to streaming disney's in a clearly better spot that was low lights um there's a few that i had here that you guys didn't have here the recent capital allocation decisions seem poor um the acquisition of fox i mean can we say it was clearly a bad deal at that price like what were their big what hot star is kind of their big box i mean box content the simpsons um avatar i guess came with that some other stuff but look was it just think about it if disney didn't have them and i think national geographic was in there as well but again i don't have all the details on that Fox owned, if they just raised all the money and had $70 billion, would it be better

to have that or Fox? I mean, come on. Or it just seems like it gives me, it doesn't give me the highest of confidence that the executive team will act rationally for shareholders. Because if I saw that deal, I mean, clearly, look at the revenue for share, look at all that stuff. And yeah, COVID's been in the mix, but it's been down. It hasn't been great since the acquisition.

Now, let's see. The flip side of pricing power, I think, is a bit of a low light for me because if you're growing from raising prices, especially at the parks, all else equal, I think it's typically the weakest form of growth because you have to make sure you're taking care of all your stakeholders. If you're pushing out the lower income consumers, that could be a negative for your brand. If it's only rich people that can afford to go to Disney World and Disneyland. Yeah, it's great for margins, but how many people are going to be really upset with you? Yeah, I mean, the margins are going to be fantastic, but again, you don't have infinite price power. It seems like they do, but eventually they'll reach that limit. And then lastly, I think the only one else we haven't discussed is I think the chance

of writing down the China business to zero seems high. Don't like the China risk with this business. All right, bull case, Brad, what do you think? Yeah, so for me, I mean, the bull case is pretty wonderfully simple. So it continues rapid subscriber growth within streaming and can eventually turn that into a respectively profitable self-funding business.

Maybe not another cash cow, but at that point, the pounds of cash that is being generated by the other side of the business can be used for more aggressive shareholder returns and M&A to kind of create this next leg of growth that I'm sure we'll see in a decade or two. So the bull case is that this transition goes smoothly, really, and that they continue to rapidly grow their subscriber base and they continue to see the fruits of these investments, which are quite aggressive at this point in time. So to me, it's kind of got to work if they want

to be able to, if they want to be in this position of power and flexibility, the next time we get another transition that they'd like to be a part of all right uh bear bear case do you want to move to that or do i don't know how we i can't remember if we do them combo but brad you want to get your bear case sure yeah i think so news like amazon uh buying uh nfl rights and and and bidding wars for some of this content and ryan talked about this a lot uh the pricing power they have with espn plus if they can keep that that cohort of sports rights it's massive for me, and I'm sure it's massive for a lot of other people. But it's not sticky. I don't care if I'm watching the NFL on Disney or Amazon or on Apple. I'm going to where the NFL is. I'm not

going to where Disney is. So while they are in a better position to spend than, again, all the other legacy media businesses, they're less cash rich than all the other mega cap competitors that are coming after them. So these companies have many more cash cows besides one that they can take advantage of it. And they don't need to show operating leverage here as quickly or as meaningfully as I think Disney does. And that puts them in a position to be able to outfit them on some really key sports content rights that for me would just anecdotally speaking, turn me into a customer of them versus Disney. Yeah. Ryan, what's your bull and bear case? Bull case, just to put some numbers on it, I think five years. Over the next five years,

they reach 400 million total subscribers. I think they're north of 200 million right now, but it's, uh, but they also, some of those are bundle subscribers that count as three. So either way, I'm just going to go ahead and say a double in subscribers. I think that's realistic. Um, aggregate ARPU doubles. So total revenue on a per user basis doubles across the board. Um, they grow slightly grow, uh, visits to this to their parks and then tickets grow mid to high single digits on an annual basis

or ticket prices and if you add all those things up and i think if they're at 400 million subs and they're generating double the arpu they have today i would have to imagine that there's some sort of profitability on that streaming business yeah and you're including advertising people are like where they're going to get that double third they're launching advertising across a lot of the stuff now right i mean that should juice our poo as well um yeah if the streaming economics get put to rest and and the parks is really sort of this this steady stalwart uh i think there's a reasonable path to more than 15 free cash flow margins keep in mind there is that high capex involved with uh both both production and uh parks so 15 free cash flow

margins on that base i think you're going to get good returns yeah i mean or if you want to go bear case uh bear case is that the competition for attention just continues to increase costs and that this the streaming is almost a lost leader or is like this break even where they're just constantly spending you're never sure what the economics are going to look like and then um that i mean that is not the end of the world if it's a loss leader for the parks where the parks juice is all the cashflow, but it's a very different investment and you're probably not generating really solid returns with that. Yeah. Yeah, I guess, I don't know, up to the listeners to decide. All in mind, I mean, at the current enterprise value, which to reference again

is about $255 billion. I mean, you probably have to see a path to about $20 billion in annual free cashflow to make this work out over the longterm because you need to see the cashflow eventually um i think this can be done basically you get 10 billion from parks i think that's doable for sure especially with these expansions especially if international comes back and then you have to see 10 billion dollars for the video entertainment segments if they're successful on both ends i mean you get the streaming ambitions met parks recover and are the cash cow which is a little less risky i mean streaming is still a little bit more speculative what the long-term unit economics are going to be the investment will do quite well um i i wouldn't guarantee it

because you never know if management's gonna mismanage some stuff but yeah all right i'll hit my bear case and the china risk is big writing that down that's a huge market for them they haven't been able to release a lot of movies over there and who knows when the parks are ever going to be fully open again um i think there's been some mismanagement on some of the prized assets star wars in particular doesn't seem to be utilized as well as it should be or maybe they're fixed but we'll see i mean they've had some total hits yeah hits on money for money making yeah i mean what the baby yoda oh yeah for sure i mean they've had some recent series but yeah do you lose some of the affinity for the brand by having flops because i think they've also

had some misses yeah i mean my dad was a huge star wars fan growing up he'd care less about any of this stuff i mean he's older now and you can see that happening to a lot of people it's anecdotal but look i think it's just a concern like they need to manage it well when you have these prized assets um and then yeah again bear case for me is a lack of true profitability and streaming i think that's the big concern is the lack of profitability in streaming all right more or less interested brad yeah i'd go more um i i think i think i made it pretty clear why i like the company. So I won't, I'll try not to repeat myself. I just see just very high probability of it continuing to compound at that maybe five to 10% growth clip. And I see it as a very high

likelihood winner in this transition. So I'm more interested. Ryan? Less. Oh, surprise. And there are people that are smarter than me, investors I look up to that own this. and when i hear them talk about it it's like it's almost like they're like it's so frustrating i don't know what streaming's you know we don't know what content span and what it's going to look like and it seems like a lot of frustrations on their end i just don't see why like it seems like there's easier bets to make if if streaming is kind of this big uncertainty yeah it's a fair point yeah yeah i kind of agree i don't even know what i'm i feel like i should be more interested because the parks business is amazing but i kind of say on the fence it the price doesn't look too

appealing to me versus the execution they're going to have to do onslaught of competition sports rights well i gave a good bull case for it i don't it's just tough to know what's going to happen. So I would love to buy this for 10 times parks income, but that's never going to happen. All right. We have stock for next month, Brad, on the monthly cadence is going to be joining the show. So what do you have for us for the next time you're on? Yeah. I've got another lending disruptor. I say kind of sarcastically a bit, but maybe not. We'll see. Called Pagaya. So So I own Upstart. It's about $2 billion market cap. It's deeply profitable. It's much larger than Pagaya and growing at a similar pace. And Pagaya is at a $14 billion market cap. So

a 7x premium for a lot smaller business. So I'm very eager to kind of dig into this one and see what's going on here and to see if this is just the most impressive, amazing company in the entire world and kind of why. So I'll keep an open mind and excited to dig in. All right. And it's Pagaya Technologies. We should be clear. Oh, thank you for that. They are a SoFi partner, so I like them already. All right. So spell like papaya with a G. With a G. Yeah. We'll get all the info. It should be a fun investigation next week. All right. That's going to do it for this episode. Thank you all for subscribing. Remember,

any complications with a subscription, email us, chitchatmoneypodcast at gmail.com. Remember, we are not financial advisors. Anything we say on this show is not formal advice or recommendation. We are general partners at Arch Capital. Ryan and I are general partners at Arch Capital. So clients, bankable securities discussed in this podcast. Thank you all for listening. We'll see you next time. Thank you.