Disney (NYSE:DIS) stock has soared to all-time highs in the wake of a successful rollout of the company’s highly-anticipated streaming service, Disney+.
Disney+ started generating internet-wide buzz as soon as it debuted on Nov. 12 in the United States, Canada, and the Netherlands. Within 24 hours, 10 million people had signed up for the service, a whopping number that no one had expected. Investors cheered the wildly successful rollout. In response, Disney stock jumped more than 10% to an all-time-high price of $150.
The Outlook of Disney Stock
Disney+will cause Disney stock to jump further in the long-run. But in the near-term, the good news is already priced into DIS stock.
But the owners of Disney stock shouldn’t sell their shares. The shares have a lot of momentum and in the long-term, DIS stock price will climb further. On the other hand, investors shouldn’t buy Disney stock now because in the near-term, DIS stock will probably consolidate around the $140 to $150 level.
Buying the shares on weakness for $140 or lower and holding onto them for the long-haul is the best move at this point.
Disney+ Will Drive Disney Stock Higher Over the Long-Term
Disney’s recent rally was just the beginning of a multi-year advance by Disney stock.
Over the past few years, DIS stock price hasn’t gone anywhere because its profits haven’t risen, and investors have had zero confidence in its future growth.
While Disney’s Parks, Studio, and Consumer Products businesses have been firing on all cylinders, the company’s Media Networks segment, its biggest division which generates money from pay-TV ads and subscriptions, has reported steady revenue and profit declines amid cord-cutting headwinds. There was no clarity as to when the profit erosion would end.
Thus, Disney stock had been weighed down by a lack of profit growth and bearish investor sentiment.
That’s all changing now. Disney+ is Disney’s answer to those cord-cutting headwinds. Management knows that it can’t reverse the cord-cutting trend. So instead of trying to keep customers hooked to pay TV, the company is jumping into the streaming world by launching its own streaming service. It’s hoping that cord-cutters turn into Disney+ subscribers and that Disney doesn’t lose any money in the process.
Early data (the 10 million subscriptions in one day) indicates that the company’s aspirations will come true. Disney+ will be a huge success over the next several years. All the subscribers that the service will add will more than offset cord cutting. Disney’s revenue and profit will resume growing and will rapidly accelerate. Investors’ sentiment towards Disney stock will improve, resulting in multiple expansion.
As a result of these trends, DIS stock will surge over the next several years.
Beware Near-Term Valuation Risks
Over the last five years, the average forward price-earnings multiple of Disney stock has been about 17. Over the past decade, DIS stock price has spent very little time trading north of 20 times analysts’ average forward earnings estimate. The forward earnings multiple of Disney stock today is 27. That’s a very high number for this stock.
Some bulls will say the high multiple is warranted because of the upcoming growth of the company’s streaming offerings. I understand that argument. But the numbers show that the argument doesn’t hold water.
The Parks, Studio, and Consumer Products businesses should continue to grow at their longtime average rates, with largely stable margins. The Media Networks business will struggle for the foreseeable future, although it won’t shrink much, since most U.S. households still subscribe to pay TV. Meanwhile, Disney+ will probably hit 100 million or more subscribers by 2025, while Hulu and ESPN+, its two other main streaming channels, will grow steadily. As the company’s streaming business grows, its margins should climb towards 10%, right around where Netflix’s (NASDAQ:NFLX) margins are today.
Based on all those aggressive long-term growth assumptions, an aggressive but realistic 2026 earnings per share estimate for DIS is $11. Based on a forward price-earnings multiple of 21, which is average for growth stocks, and a 10% discount rate, that equates to an end-of-2020 price target for Disney stock in the $150s.
That’s roughly where the shares trade today
The Bottom Line on Disney Stock
Disney+ will push DIS stock price higher in the long-run, but concerns about its valuation will limit its near-term gains.
As a result, investors should stick with DIS stock for the long-haul, but they shouldn’t buy the shares at their current levels. Let the Disney+ hype die down and let Disney stock price fall back towards $140 or lower. Then buy the shares. Until then, be patient.
As of this writing, Luke Lango was long DIS and NFLX.
