Primarily because of the secular trend of chord cutting, Disney (NYSE:DIS) stock has lagged during the past five years. Consider that the average annual return was about 10% on Disney stock. By comparison, Netflix (NASDAQ:NFLX), which has been disrupting the traditional entertainment business, has logged a hefty 35% average return during the same period of time.
But as for this year, Disney stock has been getting its grove back. The shares are up about 26%, and I don’t think this will be temporary. If anything, DIS stock does look to be at a turning point and poised to see a pick-up in growth. The valuation on the shares is also reasonable, with the price-to-earnings ratio at 17.5X.
OK then what are some of the drivers for Disney stock? Well, there are a variety to keep in mind.
1. Content Machine
Producing hit movies has always been difficult. Yet things are even more difficult nowadays because of the enormous costs. Just one flop can tank a company’s quarter.
But for Disney, the company has made movie production look…easy. It seems that everything it touches turns to gold.
For the year so far, Disney has already broken the industry record for movie revenues – at over $8 billion. Some of the titles include Avengers: Endgame, The Lion King, Captain Marvel, Toy Story 4 and Aladdin.
The success is testament to the talent and infrastructure of Disney. But another key has been the strategic vision of CEO Bob Iger, who has struck acquisitions for companies like Pixar, Marvel and Lucasfilm.
2. Parks and Products
The Parks and Products business is fairly mature, with not too much growth. During the latest quarter, revenues increased by about 7% to $6.6 billion.
But the segment is critical. It provides a nice source of steady cash flows, which allows for investments in other parts of the company (say for streaming). But there is also the benefit of synergy. Let’s face it, the theme parks are an amazing way to gin up demand for movies.
Disney is also experimenting with different form factors, as seen with the Star Wars: Galaxy’s Edge park. For the most part, it looks like it has gotten off to a great start.
Also, when it comes to merchandising, Disney is looking at rethinking the approach. To this end, the company has teamed up with Target (NYSE:TGT) for have “shop-in-shop” locations in 25 stores (there will be 40 more by October 2020).
3. Disney Stock and Streaming
The biggest catalyst for Disney stock will be the aggressive move into streaming. It’s certainly an all-in bet. After all, the company shelled out $71.3 million for 21st Century Fox, which has provided a big boost to the content library. The company has film franchises like Avatar and Marvel’s X-Men, cartoons (Ice Age and Rio) as well as strong TV shows.
As for the Disney streaming service, it will launch in November and the pricing will be highly competitive, especially when compared with Netflix. Note that Disney+ will go for a mere $6.99 per month.
The company’s own guidance is that service will signup about 25 million U.S. subscribers and roughly 50 million international subscribers by 2024. Yet I think these numbers are fairly conservative, in light of the advantages of the Disney brand, the massive distribution footprint, the treasure trove of content and the affordable price point.
According to InvestorPlace.com’s Luke Lango:
“Over the next few years, this stock will trade almost exclusively on Disney+, and Disney+ has a very realistic chance to blow current estimates out of the water. That combination ultimately means that DIS stock looks good for the next few years.”
Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.