Disney Needs 30% Annual Revenue Growth from Playdom

Disney (NYSE:DIS) recently announced that it was spending about $763 million to acquire Playdom, a social gaming service that competes with Zynga and others. Disney competes with News Corp (NASDAQ:NWS), Time Warner (NYSE:TWX), Viacom and other diversified media conglomerates.

Big media companies covet the huge audiences that social networking startups have built over the past few years. Below we explain why Disney’s acquisition of Playdom makes strategic sense and discuss its possible impact on Disney’s stock.

Why Disney likes social gaming

Disney expects the worldwide social gaming audience to grow at an annual rate of 30% going forward.Playdom is the largest social game publisher on MySpace and the third largest on Facebook, with about 38 million active monthly users, according to a recent article in Forbes magazine.

Playdom can now weave Disney’s popular characters and brands into its online games. Disney estimates that 50 million Facebook users currently belong to various Disney, ESPN and ABC groups. This should make them a natural audience for Disney-themed Playdom games.

Playdom and Disney by the numbers

Playdom posted revenues of nearly $50 million in 2009, less than 2% of Disney’s total consumer product revenues (excluding Marvel revenues) which stood at an estimated $3.1 billion last year.

We expect Disney’s consumer product revenues to rise over the next few years, reaching about $4 billion by the end of the Trefis forecast period. You can drag the trend-line in the chart below to create your own consumer product revenue forecast and see how it impacts Disney’s stock price.

Although Disney’s consumer product profit margins fell sharply in 2008 and 2009, we expect them to rebound going forward, nearing 20% by the end of the Trefis forecast period. A few months ago, Techcrunch estimated that Playdom rival Zynga had operating margins of about 30%. Because Zynga has a much larger user base than Playdom, we believe that Playdom’s operating margins are lower.

Assuming after-tax  margins of around 15%, our back-of-the-envelope calculation suggests that Playdom will need to maintain an average annual revenue growth rate of 30% during our forecast period to justify Disney’s purchase price. We think this growth target is achievable with Disney’s backing.

You can see the complete $37.44 Trefis price estimate for Disney’s stock here.