Disney's Smallest Unit Shows Outsized Growth

NEW YORK (TheStreet) -- When consumers and investors think of Disney (DIS), they naturally see the company's vast theme parks and media assets, which bring in billions of dollars annually. However, the company's smallest unit makes the stock worth a closer look, as it transforms itself from the runt of the litter to a profitable, recurring-revenue-driving machine.

Disney Infinity, released in August of 2013, is the new winner for Disney's Interactive business segment. The interactive video game, available for multiple platforms, allows gamers to connect into different worlds through different Disney characters that can be collected. Similar to Activision's (ATVI) popular Skylanders franchise, consumers are encouraged to buy additional expansions to unlock new levels and playable characters.

The results for Disney have been stellar and the company isn't stopping. A new teaser video posted to YouTube shows off a new version of Disney Infinity, dubbed the "2.0 Edition," that tells gamers to "get ready to assemble," foreshadowing the launch of a rumored The Avengers version of the game. There were also earlier rumors of a Star Wars version of the game or at least a character pack.

These two franchises are huge and could mean a lot for growth of the game. The current starter pack, featuring three characters, ranges from $49.00 to $64.99 depending on the platform. The most recent Phineas & Ferb expansion pack, which includes two characters, retails for $30.78 on Amazon  (AMZN). Disney could do a separate Avengers game with a starter pack consisting of Iron Man, Captain America, and Thor and retail it for a similar price. The expansion packs could feature other other characters like Hulk, Hawkeye and Black Widow. A villains pack could have Loki, Red Skull, and Whiplash. The company could also release a Guardians of the Galaxy themed pack around that movie's release in August.

Similarly, Star Wars could end up being the third version of Disney Infinity. The starter pack could come with Luke Skywalker, Darth Vader and Yoda. Expansion packs could have Han Solo, Chewbacca, Princess Leia, C-3PO and R2-D2. The highly anticipated Star Wars Episode VII, to be released Dec. 18, 2015, will give ample characters to keep this version going for quite sometime.

Disney has been smart with expansion packs and at price points of over $10 for each individual figure, the sales continue to ramp up. Expansion packs have centered around themes of villains, sidekicks, girl power, and individual movies. Disney has also partnered with retailers like Best Buy (BBY), Target (TGT), Gamestop (GME), and Toys 'R Us to release exclusive or early released characters to the masses.

As of January, Disney has sold over 3 million starter packs, plus many additional expansion packs. In December, Disney sold 551,000 starter units, coming close to Activision's Skylanders Swap Force monthly total of 597,000. The new game and expansion packs are also helping Nintendo (NTDOY), which has seen the most units sold for its Wii platform.

"We believe we've set the stage for Infinity to be an enduring video game platform," Disney said when it announced it had reached 3 million sales.

Of importance to investors, this new game and expansion pack adds an additional leg of revenue generated from hit movie releases. The movie Frozen, for example, was released in theaters and is hitting revenue lines for consumer products, theme parks and now interactive.

The platform has helped the interactive unit to turn a profit, after once being a loss-bearing unit. In its fiscal 2013 earnings report, Disney posted revenue of $45.0 billion, an increase of 7%. Company operating income increased 8% to $10.7 billion. The company's interactive unit saw a 26% increase in revenue, the largest growth for all units. The segment made up less than 2% of total revenue, but continues to show impressive growth. Disney Interactive saw a full year operating loss of $0.10 billion, a 60% improvement from the prior year.

In the fourth quarter, Disney Interactive posted revenue of $400 million. This was an improvement of over 100% from the prior year and represented over 3% of total company revenue in the quarter. More impressively, the business segment posted a quarterly profit of $20 million, compared to a loss of $80 million in the prior year. This is a trend that is likely to continue as the segment sees expansion packs post strong sales.

After an impressive 50% increase in Disney's share price through 2013, shares are up a tiny 1% in 2014. With strong growth coming from the company's Marvel and Star Wars acquisitions, shares should see stronger returns going forward. Disney's parks, media, and consumer assets will continue to grow. The growth of the interactive business segment is the icing on the top to this great media company that should already be in your portfolio.

At the time of publication, the author had no positions in any of the stocks mentioned.

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