Anyone looking for a company that’s engaging the public and monetizing digital content in exciting ways should pay more attention to Walt Disney Co.’s (DIS) quarterly results than Twitter Inc.’s (TWTR).
Yes, it seems outlandish and intentionally provocative to say a 90-year-old company that runs roller coasters and makes hand-drawn cartoons is the hot digital play versus Twitter, a fabulously flexible, high-potential social-network platform. And Twitter, of course, has only begun trying to pull revenue from tweets by tailoring advertising to its users' preferences, and has generated tremendous interest from big marketers to reach consumers in this and other ways.
The company reported surging revenue and earnings of 2 cents a share, its first profit, versus expectations of a 2-cent loss. But user growth was modest, and there was a worrisome decline in how often folks look to their timelines of tweets, a sign of possible user fatigue. Its shares were pounded by as much as 20%.
A key element of a hyper-connected world – in which consumers have constant access to media and therefore advertisers have constant access to consumers – is that the highest-quality branded media assets will profit disproportionately.
Disney – which reported stellar fiscal first-quarter operating earnings of $1.04 a share, 12 cents above forecasts and up from 79 cents a year earlier – was named Yahoo Finance Company of the Year for 2013, for its unmatched portfolio of entertainment assets, disciplined investments in its business under CEO Robert Iger and shrewd approach to digital-media distribution.
Talk about engagement: The company well exceeded $4 billion in 2013 box-office revenue, and its hit animated feature "Frozen" has so resonated with its young audience that the company is showing a modified "sing-along" version in theaters, while planning a live Broadway production. Operating income rose in the double-digits in each division, and Disney shares rose more than 6%, to the cusp of a new all-time high.
A giant among media giants
Anthony DiClemente, analyst at Nomura, says among media giants, “Disney is positioned best to manage industry changes that are driven by digital technology.” He argues that no peer can match the way Disney enjoys synergistic growth across business segments, from films to theme parks to consumer merchandise to interactive games. Think Marvel superheroes, princesses, Muppets and cars, and consider how many movies, shows and T-shirts feature them. “Technology allows this effect to reverberate globally,” DiClemente says.
In an interview in December before our Company of the Year feature, Iger cited a favorite analogy, drawn from the writings of Warren Buffett partner Charlie Munger, about the advent of soda vending machines and its catalytic effect on Coca-Cola’s early growth. The availability of a cold Coke anywhere made a beloved product that much more popular and lucrative.
Similarly, giving billions of people globally ESPN sports highlights on their smartphones as they wait for a train or eat lunch at McDonald’s (MCD) makes a Disney product ubiquitous, and that much more valuable.
This doesn’t mean Disney is somehow immune to the stresses being applied to the traditional media economy. Disney – with media networks anchored by ESPN and Disney Channel producing two-thirds of its profits – benefits greatly from the traditional “cable bundle” of programming sold to subscribers. À la carte viewing is slowly eating away at cable subscriptions and TV ratings, replaced in part by sales of content to Netflix Inc. (NFLX) and the like.
The ABC network is in the same boat as all broadcasters, struggling to navigate toward a digital model and chase after an audience that was once effortlessly theirs. And Disney’s interactive-games effort has had a hard time turning profitable and generating huge hits. News reports this week said hundreds of layoffs are about to hit this division.
Yet Disney has the character sets and exclusive real-time sports programming that are far more resistant to these forces than others. And because its character franchises are so powerful and travel so well globally – Marvel heroes, "Star Wars" legends, Pixar’s menagerie – enthusiasm for them feeds back toward an eagerness to experience them in person in the company’s parks.
At this time of consumer frugality and screen-based entertainment, Disney parks attendance has been strong and per-capita spending at its domestic parks has increased by 8%, 7% and 8% the past three fiscal years, respectively, despite low reported inflation. Disney’s heavy investment in the MyMagic+, an all-in-one technology-enabled pass to customize a Disney park visit, is expected to further foster visitor loyalty and goose park operating margins.
Many of Disney’s virtues are well understood by Wall Street, and investor enthusiasm is building toward a big 2015, with the opening of Shanghai Disney and the first new "Star Wars" film released under Disney’s stewardship.
Yet the broad market pullback has dropped Disney shares 6% from their all-time Dec. 31 high, and the spirited rally in other media stocks has all but closed the typical premium valuation Disney has enjoyed. Even after a post-earnings pop, this has presented a decent buying opportunity for long-term holders who seek to own part of a company that’s impressively capable of producing digital-media magic.