What Does 'Avengers: Age Of Ultron' Mean For Disney?
Apr. 24, 2015 8:48 AM • dis
- The highly anticipated sequel to the third highest grossing movie of all time, Avengers: Age Of Ultron debuts in theaters next Friday, May 1.
- The original Avengers, released in 2012, grossed $623 million domestically and $1.5 billion worldwide for Marvel Studios, owned by Disney. Since then, Disney's stock price has rallied over 160%.
- This article discusses the box office prospects for Age of Ultron and the impact of the film on Disney. My trading strategy is also discussed.
One of Disney's (NYSE:DIS ) greatest acquisitions in a long history of corporate raiding was the 2009 purchase of Marvel Comics for $4.0 billion. Since that time, the studio has released 8 superhero films that have grossed in $2.5 billion in domestic box office receipts and $6.3 billion worldwide. The greatest of these, of course, was 2012's The Avengers, the capstone of Marvel's Phase One. The film debuted during the first week of May and grossed a stunning $207.4 million in its opening weekend, a record that still stands today. The film was exceptionally well liked and held well over the coming months, ultimately grossing $623.4 million, the third highest domestic total of all time - and the first film to break the $600 million mark not directed by James Cameron.
Since that time, superheroes have sat on top of the pop culture pantheon. Since the first full-length trailer for the sequel Avengers: Age of Ultron hit the Internet last October setting viewership records, the film has been pegged as the most-anticipated of the year - and arguably of the decade, depending on your demographic and interests. The film is set to debut next Friday, May 1, and promises to be a box office bonanza, likely to bulldoze its way into the record books. However, with Disney's stock price nearly tripling since the release of the first Avengers, investors' expectations for the film exceed those even of the superhero team-up's innumerable fans. This article discusses the box office prospects for Avengers: Age of Ultron and their impacts on DIS in the short and long term. If you are looking for a detailed number crunching, financial breakdown of DIS as a company, this is not the article for you. But if you are looking for a playful romp through box office history to analyze a major upcoming cultural event and to apply these results to Disney's stock price, please read on.
The initial impact of Age of Ultron on Disney will be the film's opening weekend, the Friday-Sunday sales. Opening weekend grosses of major sequels are influenced by the reputation of the initial film, running time, and theater count. However, the 3-day gross is much less influenced by reviews than the final gross unless reviews are exceptionally good or exceptionally bad. Strong goodwill from the original, a running time 10 minutes shorter than the first film allowing frequent screenings and a super-saturated theater count of over 4000 will all favor a monstrous opening weekend.
In order to project Age of Ultron's opening weekend, we turn to box office history. The original Avengers opened on a Friday to $80.8 million, good for the second largest single-day gross of all time behind Warner Bros' (NYSE:TWX ) Harry Potter and the Deathly Hallows Part 2's $91.1 million return. However, the film held up extremely well over the weekend, grossing $69.6 million and $57 million on Saturday and Sunday, respectively, for a stunning $207.4 million weekend, the largest weekend opening on record by over $33 million. The top 10 domestic opening weekends are shown below in Figure 1. Note that half of these are Marvel or DC Comics' properties, illustrating the pervasive popularity of the genre over the past few years.
Can Avengers: Age of Ultron top the record-setting opening of the original Avengers? An initial projection can be made by looking at fellow Marvel properties Iron Man, Captain America: The First Avenger and Thor, which saw their respective sequels (Iron Man 2, The Winter Soldier, and The Dark World, respectively) boost their opening weekend grosses over the originals by 30%, 30%, and 46%, or an average of 35%. Should the Avengers: Age of Ultron see a similar bump, it would open to $280.1 million. Unfortunately, this is almost certainly an unrealistic fantasy. Iron Man, Captain America, and Thor were all lesser known properties when the first films were released leading to a much larger gap between the original and sequel. In the truest sense of the term, The Avengers was not an "original film" but rather, thanks to a brilliant marketing strategy by Disney/Marvel, the culmination of a multi-year series of films introducing each member of the Avengers, known as Phase 1. Thus, public awareness and anticipation had been built up over four years and was at a feverish level at the time of its release.
I believe that a better predictor of opening gross will be the first two Hunger Games films, released by Lions Gate Films (NYSE:LGF ). While, unlike the Avengers, 2012's The Hunger Games truly was an original film, the release was impeccably timed and public interest in the series had reached a pervasive level similar to that of The Avengers. The Hunger Games' $152.5 million opening weekend set a record for non-sequel opening that still stands (again, unless you consider The Avengers a non-sequel). 18 months later, the sequel, Catching Fire, opened to $158.4 million, a 3.9% bump. Should Avengers: Age of Ultron see a similar bump, the film would open to $215 million. Adjusted for ticket inflation, this would come out to $220.2 million, which I believe to be a reasonable number. I expect that this will be an opening weekend record that will stand for a long time.
While opening weekend gross is not strongly influenced by the quality of the film as much as the goodwill of its predecessor, the final gross is heavily dependent on the theater-goer experience and word of mouth. Hardcore fans will rush out to theaters opening weekend regardless of reviews, but it takes a quality film to bring in casual fans and repeat viewers week in and week out. Horror films, in particular, tend to be exceptionally front-loaded. The 2009 remake of Friday the 13th, for example, opened to a very solid $40.6 million in its opening weekend. But thanks to poor fan reception, the film tanked thereafter and only grossed $65.0 million, a record 62% of which was collected on opening weekend. Fan favorite and cultural phenomenon Paramount's (NASDAQ:VIA ) Titanic, on the other hand, grossed a mere $28.6 million its opening weekend before demonstrating unparalleled legs on its way to a $600 million domestic gross, just 4.7% of which was grossed in its opening weekend. Figure 2 below shows the top 10 grossing films of all time. Note that 3 of the top 10 belong to comic book franchises.
When "Event Films" open as big as The Avengers, they tend to be front-loaded regardless of reputation due to the fact that such a large proportion of the fandom go to see it opening weekend. The concluding film of the Harry Potter octilogy (?), Harry Potter and the Deathly Hallow's Part II opened to $169.1 in 2011, good for 3rd place on the opening weekend list, but went on to peter out relatively quickly, grossing "only" $381.0 million, despite its overall favorable reputation.
Despite its even larger opening, the Avengers held exceptionally well. It is the only film to break $100 million in its second weekend and saw relatively small 20-45% week-over-week declines thereafter leading to its $623 million total gross. The film was very well reviewed with a 92% Rotten Tomatoes rating and well-liked by viewers with an 8.2/10 rating on IMDB. After its release, it quickly became a cultural phenomenon and not only benefited from repeat fan viewings, but it attracted casual moviegoers as well who wanted to be in on the conversation.
So where will its sequel end up? We can project the film's final gross using its Marvel stablemates as models. Let's assume that Age of Ultron grosses $220 million in its opening weekend as discussed above. Using this number as a starting point, we can use week-over-week declines of other pictures to predict total grosses. Figure 3 below shows the projected total gross for Age of Ultron if the film were to follow the % week-over-week declines of each of the 10 Marvel films to date as well as the average of all Marvel films.
Figure 3: Projecting Age of Ultron Domestic Gross Using Other Marvel Films as models [Source: Box Office Mojo ]
Of the 10, last summer's Guardians of the Galaxy had the strongest legs, grossing over $333.1 million domestically after a $94.3 million opening, a 3.54x multiple. A box office multiple in this context is equal to total gross divided by opening weekend gross. Were Age of Ultron to follow a similar model, it would wind up grossing $765.2 million, which would topple 2009's Avatar as the highest grossing domestic film of all time. However, I consider this to be highly unlikely. Guardians of the Galaxy was an original movie that had relatively low expectations going to its debut but benefited from strong word of mouth in the weeks following its release. As discussed already, Age of Ultron is a sequel and will not be sneaking up on anybody and will not benefit from the same strong word of mouth.
On the other side of the coin, Iron Man 3 opened to a spectacular $174.4 million in 2012 good enough for the second largest opening weekend of all time - ironically, thanks largely to goodwill from The Avengers a year earlier - but was received relatively poorly by fans and petered out quickly, grossing "just" $409 million, a 2.34x multiple. Were Age of Ultron to follow a similar track, it would wind up with just $513.7 million, which would still be good enough for fifth place on the all-time domestic chart.
While Age of Ultron's domestic gross is certain to fall in this range, a $250 million spread is unacceptable.
To narrow our range, let's take a look at early reviews for the film. The review embargo on Age of Ultron was lifted yesterday and so far, the reviews are good - but not as spectacular as the original. The film currently holds an 79% favorable on the review aggregator site Rotten Tomatoes versus 92% for the original with the consensus stating: "Exuberant and eye-popping, Avengers: Age of Ultron serves as a suitably satisfying sequel, reuniting its predecessor's unwieldy cast with a few new additions and a worthy foe ." However, even the positive views note that the tone of Age of Ultron differs from the original Avengers with Helen Ohara of Empire Magazine noting that "Bigger and, yes, darker than the first, this is less air-punchingly gleeful but probably more consistent." Other concerns include an overlong running time (even though it is actually 10 minutes shorter than the original Avengers), anti-climactic ending, and the feel that much of the movie is a set-up for Marvel's upcoming Phase 3. Stephen Lambrechts of Neon Mechanics sums up what I believe will be a general consensus of the film stating that "Avengers: Age of Ultron is a perfect example of the kind of crowd-pleasing blockbuster that audiences expect in this day and age, though I don't think it will achieve classic-status like the first film ." Part of what made the original Avengers so popular was not only its action sequences but its wit. If this film is indeed darker and more set-up than a standalone film, I suspect that it will not be as appreciated or enjoyed by audiences at large and am therefore concerned that it will not see the same penetration as the original. Typically, Rotten Tomatoes ratings will slowly decline in the days leading up to the film's release as reviews accumulate and I expect that Age of Ultron will stabilize at around 75%.
Figure 4 below shows the Rotten Tomatoes % positive reviews for each of the 10 Marvel films to date.
Figure 4: Marvel films ranked by Rotten Tomato rating [Source: Box Office Mojo ]
At 79%, Age of Ultron is below the average Marvel film, which is 81%. Note that there appears to be a direct correlation between the Rotten Tomatoes rating and box office multiple. If this data is plotted on a scatterplot the result is the linear relationship shown below in Figure 5.
Figure 5: Marvel's Rotten Tomatoes rating versus box office multiple showing linear relationship indicating that popular movies tend to have better legs. [Source: Rotten Tomatoes ]
Let's assume that Age of Ultron debuts with a 75% rating on Rotten Tomatoes. Using the data in Figure 5, this would predict a 2.49x multiple. Given my projected $220 million opening weekend, such a multiple would correspond to a $547 million total gross. Indeed, this is inconsistent with what I believe to be the strong historical comparison: Iron Man and Iron Man 2, the franchise that kicked off Marvel's Phase 1 back in 2008. The original Iron Man had the same balance of wit and spectacle that made Avengers popular and had a 93% rating to the Avengers' 92%. When Iron Man 2 was released in 2010, there were expectations that it would set a new standard for the superhero genre. Instead, the film took a darker turn and did not have the same level of playfulness as the original and carried a 73% Rotten Tomatoes score, near where I expect the Avengers: Age of Ultron to end up. The film had an impressive $128.1 million opening weekend, but ultimately failed to reach the gross of its predecessor, returning $312.4 million versus Iron Man's $318.4 million. I see Age of Ultron being somewhat similarly received. Should the film follow a similar decline from what promises to be a huge opening weekend, it would wind up with $536.0 million.
Now let's consider the public-at-large's expectations for the film. The website Hollywood Stock Exchange allows users to "trade" films as stocks and profit when they exceed expectations at the box office. While the money is just pretend, I have found that the competition between users that the site inspires allows it to be a strong predictor of box office performance. It presently projects that Age of Ultron will gross $560 million in its first four weeks. This would place it similar to the Thor model, which projected a $554 million return in its first four weeks. Were Age of Ultron to follow this curve, it would wind up with $605.9 million, or nearly $60 million more than my projection.
In summary, I expect that the Age of Ultron will gross between $535 and $550 million by the time it closes.
Given that the original grossed over $620 million and many expect that Age of Ultron will match or exceed this gross, I am concerned that the film will be viewed as a relative disappointment - at least domestically.
That being said, with a $250 million budget and perhaps another $100-150 million for marketing, it is still certain to make an enormous profit - most of which won't even come from this country. While domestic grosses are closely watched due to their impact on merchandizing, I believe that one of the big stories with Age of Ultron will be its foreign grosses. While domestic grosses are influenced by reviews and word of mouth, the international box office can often be review-proof. Case in point, last summer's Hasbro's (NASDAQ:HAS ) Transformers: Age of Extinction grossed $245.4 million in the US - a franchise low - and was very poorly received with a horrible 19% Rotten Tomatoes rating, but grossed $846 million worldwide - a franchise high - for total box office receipts of $1.091 billion.
The original Avengers grossed $895.2 million in the foreign box office to reach its $1.519 billion worldwide mark, which is good enough for third all time. Figure 6 below shows the top 10 worldwide grossing films.
Figure 6: All-time worldwide box office grosses [Source: Box Office Mojo ]
The important take away from the chart above is that 7 out of the top 10 highest grossing films worldwide have been released in the last 4 years, compared to just 3 domestically. Further, 3 of them (Avengers, Frozen, and Iron Man 3) were released by Disney. Truly, the international box office has exploded in recent years with China leading the way. Just in the past month, Universal's (NASDAQ:CMCSA ) Furious 7 debuted to a record opening day gross of $68 million in China and has earned $250 million in the country in just 8 days, handily beating its $210 million domestic 8-day gross. Overall, in less than a month, the film has earned a spectacular $1.156 billion worldwide, and will likely earn in excess of $1.3 billion by the time the film closes, good enough for fifth on the all time list.
Avengers is a much more popular franchise worldwide than Fast and the Furious. I expect that it will decimate the original Avengers' $1.5 billion gross. Furious 7 has earned 74.2% of its worldwide gross in the international box office. If we assume Age of Ultron earns $535 million domestically as calculated above and follows a similar pattern to Furious 7, this would equate to a spectacular $2.07 billion in worldwide box office receipts, good enough for second place all time behind Avatar's $2.79 billion haul. However, given the greater popularity of the Avengers worldwide, I would not be surprised if the film ultimately grosses at least $2.5 billion and makes an honest run at Avatar's mark, even if the film falls short domestically.
This all being said, I devoted the lion's share of this analysis to domestic analysis because this is the ruler on which investors will measure a film's performance. Strong international returns can help to mitigate a disappointing domestic performance in investor's eyes, but cannot alone carry a film and boost that company's investment prospects.
What does this mean for Disney? Franchise tentpole films can absolutely influence stock prices in the short term since box office numbers can be interpreted as weekly earnings statements for studios. Fluctuations in Dreamworks Animation Studios' (NASDAQ:DWA ) stock price have illustrated this several times over the years. Most recently, in May and June of 2014, the stock saw a 21% rally ahead of the release of the second film in its popular How To Train Your Dragon franchise. While the film, in my opinion, was the best animated movie of 2014, the film inexplicably disappointed at the box office, grossing less than $50 million in its opening weekend versus projections of upwards of $70 million. The following Monday, the stock closed down 10.9% and would go on to lose another 10% over the next month as the film failed to show legs and ultimately grossed $25 million less than its predecessor. Figure 7 below shows performance of DWA the months preceding and proceeding the release of the film.
Figure 7: DWA during before and after the release of How To Train Your Dragon 2, a film that was viewed as a disappointment at the box office. [Source: Yahoo Finance ]
The film ended up performing very well overseas, grossing over $600 million, 50% more than the original, although this did not buoy the stock, again emphasizing the preeminence of domestic gross over overseas gross in the eyes of investors.
The studio got some degree of retribution just last month following the release of its breakout hit Home, which outperformed in its opening weekend grossing $52 million versus most projections under $40 million. The stock saw a 6.6% pop the Monday after its opening weekend and a further 8% since as the film is now approaching $150 million domestic and $275 million worldwide on a $135 million budget.
If Dreamworks has seen wild fluctuations based on the short-term performance of its release, no studio illustrates the long-term benefits of a blockbuster franchise than Lions Gate and the Hunger Games. Prior to the Hunger Games, Lions Gate was a niche studio that released generally low budget films. It's highest grossing film had been the 2004 Michael Moore documentary Fahrenheit 9/11 with $119.2 million in box office receipts. Once it acquired the Hunger Games franchise, it rapidly became a major player in Hollywood. Figure 8 below shows a chart of LGF stock prices along with major release dates in the Hunger Games franchise.
Figure 8: LGF 2011-2013 during the release of the first two Hunger Games films showing the immense impact the films had on the company. [Source: Yahoo Finance ]
Lions Gate opened January 2011 trading at $6.70/share. When the first Hunger Games was released 15 months later in March of 2012, the company traded as high as $15.5/share after runaway investor expectations buoyed the stock. With the arrival of the sequel Catching Fire, 18 months later in November 2013, the company surged to as high as $37/share, a 452% 34-month return. While the company was likely also bolstered by the acquisition of Twilight studio Summit Entertainment in January 2012 (although only the final film in the series, Breaking Dawn: Part 2, was released by Lions Gate) and the popularity of other franchises such as The Expendables, the studio and its stock price was undoubtedly transformed by the Hunger Games.
Disney is something of a different beast. In March of 2012, when the initial Hunger Games was released, LGF's market capitalization was just $2.0 billion. The film's final $408 million domestic haul (LGF had sold off rights for most of its international markets) represented an enormous 20% of its market cap. When The Avengers was released just 2 months later, Disney had a market cap of $79.6 billion. The Avengers' $1.5 billion worldwide haul represented just 1.8% of Disney's market cap at the time.
Nonetheless, since the release of the Avengers, DIS has been on fire, with the stock returning 162% as of Wednesday's $107.94 close with a market cap of over $184 billion. Figure 9 below plots the price of Disney since the release of the Avengers to the present along with quarterly revenue and the release dates of other Marvel films.
Figure 9: Disney during Marvel's Phase 2 (2012-2015) showing the growth of Disney's revenue and share price during the release of five Marvel films. [Source: Yahoo Finance ]
Note that unlike LGF and DWA, the release of these tentpole films was not followed by spikes or sell-offs, but rather contributed to the overall steady growth of Disney.
And contribute is the appropriate word. Disney has been a money-making machine this decade. Marvel has contributed not only through its films but through merchandise tied to Marvel characters - $273 million in revenue in the third quarter alone last year - theme park rides, and even television where spinoffs Agents of Shield and Agent Carter have been runaway successes. However, Marvel has been only one component of this well-oiled machine. Disney has also seen remarkable success in its other businesses and franchises. ESPN continues to dominate sports broadcasting. Frozen became the highest grossing animated film of all time and remains a merchandizing juggernaut over a year later. Pixar continues to see strong returns from its films and merchandizing, despite a year-long hiatus. And in perhaps the greatest acquisition since Marvel itself, Disney purchased Lucasfilm in May 2011, giving it control over the Indiana Jones and Star Wars franchises. 3 Star Wars films have been announced with the first, Episode VII: The Force Awakens set to arrive in theaters this December. Regardless, the Marvel Universe remains arguably the greatest jewel in Disney's collection with nearly $7 billion in theater revenue alone over the past five years.
While the film's grosses - a projected $550 domestic and $2.3 billion worldwide minus the estimated $250 million budget and $150 in marketing expenses - may be marginal against the company's overall earnings and market cap, the success or (relative) failure of the Avengers: Age of Ultron will propel or sink the company's upcoming Phase 3 that will begin with the conclusion of Age of Ultron. The studio has already ambitiously announced 11 more films to be released over the next five years: Ant-Man (2015), Captain America: Civil War (2016), Doctor Strange (2016), Guardians of the Galaxy 2 (2017), Thor: Ragnarok (2017), Avengers: Infinity War Part 1 (2018), Black Panther (2018), Captain Marvel (2018), Avengers: Infinity War Part 2 (2019), Inhumans (2019). Filmgoers have been overwhelmed with a glut of superhero films over the past few years. In order to avoid superhero fatigue setting in, tentpole features such as the Age of Ultron must continue to up the stakes without sacrificing quality in order to persuade audiences to return for the next adventure. Otherwise, the superhero genre may head the way of the pirate (Pirates of the Caribbean excluded) and sword-and-sandal genres before it: down the tubes. In my opinion, the success of these films will hinge on the success of the Avengers: Age of Ultron.
How will I play this? I currently own DIS with a cost basis right around $100 and will continue to hold. I believe that Avengers: Age of Ultron will ultimately be viewed as a strong addition to the Marvel Universe, but will not match the level of fun and wit that drove multiple demographics to the original. Nonetheless, given the hype associated with the film and the goodwill from the original, I expect the film to have a massive and record-setting opening weekend, in the neighborhood of $220 million. Further, the film opened early in several international markets this week and I expect news of huge returns to pepper news feeds leading up to the May 1 domestic release. I will therefore ride my Disney position through early next week and then close half of the position on Friday, the day the film opens domestically. I will then close the remainder of the position the following Monday, after the stock responds to what I expect to be very strong opening weekend numbers.
Returning to Figure 8, after the release of both the Hunger Games and Catching Fire, despite the terrific openings and first several weeks of grosses, the stock pulled back 27% and 24%, respectively. This was not due to disappointment in box office returns, but rather I suspect due to the correction of the irrational exuberance that had bid the stock up excessively prior to the films' release. While given the much larger market cap and diversification of Disney, I would ordinarily not expect the company's stock to respond in such a way to a single movie. However, as I claimed above, I feel that the future of the Marvel Universe and its associated franchising beyond the films themselves is riding on the success of this movie. I project that the film will ultimately wind up with well less than its predecessor, probably in the $530-$550 million range should it follow my preferred "Iron Man 2" model. While this would ordinarily be viewed as an enormous success and overseas returns will likely outperform as discussed above, I believe this gross will be viewed as a relative disappointment given the level of hype surrounding the film and might even cast a shadow of doubt on the upcoming Phase 3.
Given that the first two Hunger Games films saw a steep correction even with strong returns in a sell-the-news type move, I would not be surprised to see a 5-10% correction should Ultron underperform its outlandish expectations. I therefore plan to take the rather unorthodox step of immediately initiating a short position in DIS the Monday after Age of Ultron's release. I plan to hold this position for 1-2 months after the film's release
However, given the strong pipeline for the studio and likelihood for a massive international return, I am hesitant to hold for an extended period of time. Should the stock dip under $100 in the month after Age of Ultron is released, I will plan to close the position before building back into a long position as I expect both the upcoming Pixar film "Inside Out" and this December's Star Wars: The Force Awakens to both outperform, although that is a topic for another article. I do not typically trade in and out of a stock long and short like this, but I strongly believe that this is a high-probability trade in an otherwise strong company.
In summary, I expect the Avengers: Age of Ultron to have an enormous, record-setting opening weekend besting the original Avengers. However, I believe that word of mouth will not be as strong as the original based on early reviews and expect that the film will fall short of the original's $623 million domestic gross by a considerable margin, although international returns will likely make up the difference, and then some. Nonetheless, I expect that the relative underperformance of the film domestically will be sufficient for some to question the invincibility of the superhero genre and, more importantly, the guaranteed success of Marvel's aggressive and expensive Phase 3 plans. While I believe that Disney remains a strong company with a multitude of pipeline projects, I believe that the Marvel universe plays a large enough role in the Disney pantheon to prompt at least a short-term pullback that I will use as a buying opportunity.
Disclosure: The author is long DIS.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.