Entertainment stocks have been in the spotlight for many of my Foolish colleagues over the past few weeks, but that’s not been because they’ve been high performers. In the past month Cineworld‘s share price plunged 33%, GameStop is down 25%, and AMC Entertainment has almost halved. These so-called meme stocks seem to be returning back to sane price levels. However, I believe that Disney (NYSE: DIS) is hugely undervalued as highlighted by the recent release of Black Widow on streaming service Disney+.
The house of mouse
Disney is the second largest entertainment company in the world with its fingers in a great many pies. The company’s revenue comes from parks and resorts, media networks, studio entertainment and consumer products. Of course, its 12 gigantic parks, including Walt Disney World and Disneyland Paris, have fallen foul of the pandemic. This sector made only $16.5bn in revenue in 2020, down $10bn from a year before. Overall, the company lost almost $3bn in 2020, down from a profit of $11.05bn in 2019.
Expansion and acquisition
Disney suffered a setback from the pandemic, but the bigger picture is encouraging. In 2009, the company acquired Marvel and spawned the Marvel Cinematic Universe. The franchise has grossed over $18bn in box office sales alone, with Black Widow being the most recent release. In 2012, it acquired LucasFilm and the rights to the Star Wars universe. In 2019, it expanded its portfolio by buying 21st Century Fox. It owns ESPN, reaching a sporting audience that its other content could never reach. In 2019, eight of the top 10 film releases were from a Disney company.
The power of Disney+
Box office takings represent only a small fraction of Disney’s revenue streams. In the case of Star Wars, Disney made just over $5bn in total revenue from its five film releases between 2015 and 2019. However, it sold over $12bn worth of consumer products like toys and jewellery, with further revenue from park visits where consumers were drawn to the Star Wars experience. Disney+ was launched during the pandemic, when most people were under lockdown in their homes. The service rapidly grew to 50m subscribers in six months, a milestone that took Netflix seven years. As the pandemic ends, many of these millions of people should be making their way into Disney parks and toy stores, though this isn’t guaranteed.
Black Widow, baby
I believe releasing Black Widow on Disney+ is a game-changer that’s sending shockwaves through the entertainment industry. On opening weekend, the film made $6om on the streaming service by selling ‘tickets’ at $30 each. Some $159m came in from worldwide box office revenue.
Disney typically retains 40% of cinema ticket sales, but keeps all the money it makes from streaming. This means that the $60m from Disney+ is worth just $9m less than the $159m box office revenue. Disney+ has exposed new customers who love its convenience — it’s cheaper to pay $30 and watch at home than to get a babysitter.
With new streaming revenue, and all operations springing back into action, Disney could make a solid addition to my portfolio at $175 per share. On the other hand, its share price was only $86 in March last year, and another shock could see it fall closer to this level. There’s also significant negative publicity coming from its former child stars, such as Britney Spears, that represents another possible risk.
Charles Archer owns shares of Netflix. The Motley Fool UK owns shares of and has recommended Netflix and Walt Disney. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.