Since we are new to The Walt Disney Company (NYSE:DIS) At the end of February, the stock is down about 32%, mainly due to multiple compressions across the market. Disney remains one of our favorite stocks in the media and entertainment industry. Disney remains the global leader in its quality family-focused entertainment franchises. We remain bullish on Disney and its many growth drivers. Disney stock is likely to be propelled higher and outperform its peers by the ongoing recovery in the theme park business and subscriber growth for franchises Disney+, Hulu, and ESPN+. Theme parks in Asia have recently reopened, are still recovering from pandemic lows and have yet to see visitors at pre-pandemic levels. We also expect the DIS studio business to recover as new film releases will ensure robust attendance. Overall, we expect attendance at various Disney properties to increase as capacity restrictions are eased around the world. Additionally, we also expect Disney+ to add subscribers quickly in the coming quarters as the services roll out in more countries. Disney+ is a must for many families.
Disney reported a solid 3Q22 quarter, beating expectations. We expect Disney to exceed and raise expectations in the coming year, driven by pent-up demand as the pandemic eases around the world. DIS stock is trading at a discount to Netflix (NFLX) despite having more subscribers to its properties overall. As such, we recommend investors buy Disney stock on any weakness.
Beats Netflix for the first time, but not for the last.
Disney+ beat Wall Street’s expectations last quarter by adding 14.4 million subscribers. Disney+ gained 4.6 million subscribers, more than expected. In contrast, competitor Netflix lost about 1 million subscribers last quarter. The additional subscribers brought Disney’s total portfolio of streaming services to 221 million subscribers (including Hulu, ESPN+, Hotstar), overtaking Netflix. We believe Disney is at the forefront of media and entertainment. The company is adding new content to its streaming services. At the same time, Disney is entering the adoption industry ahead of Netflix. Disney announced plans to launch a new ad-supported subscription for $7.99 in December. We expect Disney+ to continue gaining market share to become the world’s largest video streaming subscription platform.
The table below shows Disney’s earnings from its media and entertainment division.
Regional expansion is another growth catalyst
Disney+ has expanded its service to 42 new countries and 11 new territories in Central Europe, the Middle East, South Africa and North Africa. Expansion into new territories will be a significant catalyst for subscriber growth. Disney+ is now available in 60 countries in EMEA. Disney+ continues to offer quality and family-friendly programming and is emerging as an alternative to Netflix in many countries.
The chart below shows the increasing number of Disney+ subscriptions from Q1 2020 to Q3 22.
Disney+ is quickly bursting into the limelight as the new “Netflix” with more affordable subscriptions, new content and, more recently, global accessibility. Going forward, we expect Disney+ to be a significant growth driver for revenue, earnings, and cash flow, and recommend investors buy the growth.
Parks remain a primary revenue driver
During F3Q, Disney’s parks division has delivered most of the upside in revenue and earnings and remains a key growth driver for the company. The parks division made a notable comeback last quarter, although Asian parks remained closed for most of the quarter.
Park revenue increased to $7.4 billion compared to $4.3 billion a year ago, a 70% year-over-year growth. The Parks business is recovering from its pandemic low on pent-up demand. We continue to expect a recovery in theme park business for the remainder of the year and into 2023, driven by a recovery in international parks, higher occupancy from cruise lines and international visitors returning to US domestic parks at pre-pandemic levels. In addition, domestic parks have yet to reach pre-pandemic visitor levels from domestic customers. After all, the company recently launched the Disney Wish cruise ship with healthy demand and a lot of fanfare. Despite inflationary pressures, we expect Disney Parks to continue to generate higher revenue in the coming quarters.
The table below shows Disney’s revenue by segment.
Disney stock is in a downtrend, falling 40% over the past 12 months while the Nasdaq is down 25%. Over the past three years, Disney has declined about 23% while Nasdaq has grown 36%. However, we’re not worried about Disney stock for the next several years. We believe the company’s worst days are behind it as Disney+ grows its subscription business while expanding globally. The downtrend isn’t specific to Disney, but has also affected Netflix. YTD, Disney’s main competitors, fell lower than Disney; Netflix by about 59%; Comcast (CMCSA) up 42%; and Warner Bros. (WBD) by about 52%.
The chart below shows Disney YTD’s performance among competitors.
Disney is relatively cheap compared to Netflix. Disney trades at a discount to Netflix on both a P/E and EV/sales basis. Disney is growing faster than Netflix, despite being almost three times the size of Netflix. Disney EPS is also growing faster than Netflix’s because the company has a lot more leverage due to its multiple revenue streams — theme parks, movies, and now streaming. On a P/E basis, Disney is trading at 17.9x C2023 EPS of $5.70 compared to the media and streaming content peer group trading at 19.2x C2023. On an EV/sales, Disney trades at 2.5x C2023 sales versus the peer group average of 2.3x. We believe Disney offers a good entry point to invest in the consumer media and entertainment industry. The chart below illustrates Disney’s valuation versus its peer group.
Word on Wall Street
Wall Street is mostly bullish on the stock, and we concur with that view. Of the 30 analysts, 23 have a buy rating and the remainder have a hold rating. Disney is currently trading around $100. The mid price target is $130 and the mid price target is $140, with a high upside potential of 27-37%. The chart below shows Disney’s sell-side ratings and price targets.
Risks to our bull thesis:
Disney operates in a highly competitive market. More than ever, companies in the video streaming market are under pressure to maintain low prices while creating great content. Disney is no exception, and we think the entertainment giant will likely come under pressure to increase the cost of its streaming services due to inflationary pressures. Disney announced it would increase the cost of Disney+’s standard ad-free subscription from $8 to $11 in December. However, Disney+ remains cheaper than Netflix’s standard subscription, which costs $15.49. Although we are well positioned, we expect churn to increase due to the price increase. Additionally, we see risks to execution as the company rolls out Disney+ in new countries and performs well on its major movie releases. Other significant risk factors include new lockdown measures for the emergence of new Covid-19 strains in different regions.
What to do with the stock
Disney is in our opinion the best in class franchise with industry leading content/IP leveraged across multiple distribution platforms. The theme park business has recovered from its Covid-19 lows faster than many expected. The Disney studio continues to produce hits at an above-average rate, and the company continues to monetize it through traditional distribution channels and streaming platforms. We expect Disney+, Hulu, and ESPN+ subscription numbers to continue to grow, especially as Disney+ expands globally. Disney stock is trading at a discount to Netflix, and we believe it’s a better stock for longer-term investors due to multiple revenue streams and a popular brand.