close
close

Disney Stock: Business is recovering, making them buy (NYSE:DIS)

Disneyland Paris

aureliefrance/iStock editorial via Getty Images

Since we first recommended The Walt Disney Company (New York Stock Exchange: DIS) at the end of February, the stock fell by about 32%, mainly due to repeated contraction in the market. Disney remains one of our favorite promotions for in the media and entertainment industry. Disney remains the world leader in high quality family entertainment. We remain optimistic about Disney and its many growth drivers. Disney stock is likely to rise and outperform its peers thanks to the continued recovery of the theme park business and growth in subscribers to the Disney+, Hulu and ESPN+ franchises. Theme parks in Asia have recently reopened, they are still recovering from the pandemic low and have yet to see visitors at pre-pandemic levels. We also expect DIS’s business to recover with the release of new films, resulting in high attendance. Overall, we expect attendance at various Disney properties to increase as capacity restrictions ease around the world. In addition, we also expect Disney+ to add subscribers quickly as they launch services in more countries in the coming quarters. Disney+ is a must for many families.

Disney reported a good Q3 2022 quarter that exceeded all expectations. We expect Disney to outperform and outperform next year thanks to pent-up demand as the pandemic eases globally. DIS stock trades at a discount to Netflix (NFLX) despite having more subscribers. Therefore, we recommend that investors buy Disney shares in case of any weakness.

Overtakes Netflix for the first time, but not the last.

Disney+ beat Wall Street’s expectations last quarter, adding 14.4 million subscribers. Disney+ has signed up for 4.6 million subscribers, more than expected. In contrast, competitor Netflix lost about 1 million subscribers last quarter. The added subscribers increased Disney’s total portfolio of streaming services to 221 million subscribers (including Hulu, ESPN+, Hotstar), ahead of Netflix. We believe Disney is at the top of its game in media and entertainment. The company is adding new content to its streaming services. At the same time, Disney enters the ad acceptance industry earlier than Netflix. Disney has announced plans to launch a new $7.99 ad-supported subscription in December. We expect Disney+ to continue to gain market share and become the world’s largest video streaming subscription platform.

The following table shows Disney’s revenue from the media and entertainment division.

Subscriber Performance

Disney Presentation

Regional expansion is another catalyst for growth

Disney+ has expanded its services to 42 new countries and 11 new territories in Central Europe, the Middle East, South Africa and North Africa. Entering new territories will be an important catalyst for subscriber growth. Disney+ is now available in 60 countries in Europe, the Middle East and Africa. Disney+ continues to offer high quality programming for the whole family and is emerging as an alternative to Netflix in many countries.

The following graph shows the increase in Disney+ subscriptions from Q1 2020 to Q3 22.

Historical subscriber additions

Statistics

Disney+ is quickly gaining attention as the new “Netflix” with more affordable subscriptions, new content and, more recently, global availability. We expect Disney+ to be a significant driver of revenue, earnings and cash flow growth going forward, and recommend that investors buy this growth.

Parks remain the main source of income

During F3Q, the Disney Parks division provided most of the revenue and earnings growth and remains a key growth driver for the company. The parks division rebounded significantly last quarter, despite Asian parks remaining closed for most of the quarter.

The park’s revenue increased to $7.4 billion from $4.3 billion a year earlier, up 70% year-over-year. The park business is recovering from the pandemic crisis due to pent-up demand. We continue to expect the theme park business to recover before the end of the year and into 2023, driven by a recovery in international parks, increased cruise ship occupancy, and a return of international visitors to national parks in the US at pre-pandemic levels. In addition, domestic parks have not yet reached pre-pandemic levels of attendance from domestic customers. Finally, the company recently launched the Disney Wish cruise ship, which is in high demand and much fanfare. We expect Disney parks to continue to generate more revenue in the coming quarters despite inflationary pressures.

The following table shows Disney’s revenue by segment.

Revenue and margin by segment

Disney Presentation

Share performance

Disney shares are on a downward trend, down 40% over the past twelve months, while Nasdaq shares are down 25%. Over the past three years, Disney stock has fallen about 23% and Nasdaq has risen 36%. However, we are not worried about Disney stock in the next few years. We believe the company’s worst days are behind us as Disney+ expands its subscription business and expands globally. The downward trend is typical not only for Disney, but also for Netflix. YTD, Disney’s main competitors, fell lower than Disney’s; Netflix by about 59%; Comcast (CMCSA) by 42%; and Warner Bros. (WBD) by about 52%.

The following chart shows Disney’s year-to-date performance among competitors.

Performance of NFLX, DIS, CMSCA, WBD stocks

Ydiagrams

NFLX and DIS stock performance

Ydiagrams

Three year stock return

Ydiagrams

grade

Disney is relatively inexpensive compared to Netflix. Disney trades at a discount to Netflix on both P/E and EV/sales. Disney is growing its revenue faster than Netflix, despite being almost 3 times bigger than Netflix. Disney’s EPS is also growing faster than Netflix’s, as the company has a lot more leverage due to multiple revenue streams – theme parks, movies, and now streaming. On a P/E basis, Disney trades at 17.9x C2023 EPS of $5.70 compared to its peer media and streaming content group trading at 19.2x C2023. In terms of EV/Sales, Disney is trading 2.5x its C2023 sales compared to a 2.3x peer group average. We believe Disney is a good entry point for investment in consumer-facing media and entertainment. The following chart illustrates Disney’s valuation compared to other companies.

Media and streaming evaluation of peer group

Refinitiv & Techstockpros

Word on Wall Street

Wall Street is overwhelmingly bullish on stocks, and we agree with that assessment. Of the 30 analysts, 23 have a buy rating and the rest have a hold rating. Disney is currently trading at around $100. The average target price is $130 and the average target price is $140 with a high upside potential of 27-37%. The following chart shows Disney seller ratings and price targets.

Seller Ratings and Target Prices

Refinitiv & Techstockpros

Risks to our bullish thesis:

Disney operates in a highly competitive market. Companies in the video streaming market are under more pressure than ever to keep prices low while creating great content. Disney is no exception, and we expect the entertainment giant to likely be forced to increase the cost of its streaming services due to inflationary pressures. Disney has announced that it will be raising the price of a standard Disney+ ad-free subscription from $8 to $11 in December. However, Disney+ remains cheaper than the standard Netflix subscription, which costs $15.49. Despite a good position, we expect customer churn to increase due to rising prices. In addition, we see performance risks as the company pushes Disney+ into new countries and handles its major film releases well. Other significant risk factors include new lockdown measures due to emerging strains of Covid-19 in various regions.

What to do with stock

Disney is, in our opinion, a best-in-class franchise with industry-leading content/IP across multiple distribution platforms. Its theme parks have recovered from Covid-19 lows faster than many expected. Disney continues to produce above-average hits in clips, and the company continues to monetize them through traditional distribution channels and streaming platforms. We expect subscribers to Disney+, Hulu and ESPN+ to continue to grow, especially as Disney+ expands globally. Disney shares are trading at a discount compared to Netflix and we believe that long-term investors are better off owning these shares due to the multiple sources of income and the well-known brand.

Add a Comment

Your email address will not be published.