Editor’s note: This article is a part of InvestorPlace.com’s Best Stocks for 2020 contest. John Jagerson and Wade Hansen’s pick for the contest is Disney (NYSE:DIS).
Please keep your arms and hands inside the ride at all times … 2020 is going to be a tumultuous year.
It’s a presidential election year, the impeachment process will likely still be going and Wall Street is going to be wondering just how many new all-time highs the S&P 500 can make.
However, while there may be shorter-term spikes in volatility and uncertainty in 2020, the longer-term social and economic trends that have been building and developing for years are going to continue to play out.
Millennials are going to continue to annoy baby boomers, electric cars are going to become less expensive and more widely available and companies that can tap into subscription models to generate revenue are going to dominate Wall Street.
These companies operate in a variety of sectors. Here are just a few and the way they take advantage of the subscription model:
- Health insurance providers, like Humana (NYSE:HUM) with monthly premiums
- Retailers, like Costco (NASDAQ:COST) and Amazon (NASDAQ:AMZN) with annual membership fees
- Application software providers, like Adobe (NASDAQ:ADBE) and Salesforce (NYSE:CRM) with monthly/annual subscriptions
- And of course, media giants, like Disney (NYSE:DIS)
Disney hasn’t always taken advantage of the subscription model to generate consistent revenue. It used to be much more reliant on big, one-time product launches and movie releases.
But it has been slowly building into a subscription model powerhouse during the past few years.
So how does DIS leverage the subscription model? Let’s take a look.
Disney first dipped its toe into the subscription model with its media networks. The company started with the Disney Channel and then slowly expanded to include Disney Junior and Disney XD.
These channels bring in regular subscription revenue from the cable, satellite and now streaming packages that are bundled in. The company’s most successful media network revenue generator by far is ESPN.
Live sports still attract a lot of eyeballs in this age of on-demand television, which enables DIS to still charge a premium from any provider that wants to include the network in its packages.
However, DIS isn’t looking to simply sit back and collect regular revenue from other cable, satellite and streaming media providers. It is making a big push to go direct to consumers.
Hulu and Disney+
DIS started its direct-to-consumer gambit by joining the Hulu group in 2009. There were some growing pains, but Hulu has since emerged as a streaming media powerhouse.
In March 2019, Disney became the majority shareholder in Hulu when it bought 21st Century Fox. Shortly after in May 2019, Comcast (NASDAQ:CMCSA) relinquished its remaining control in the company to DIS.
But gaining control of Hulu wasn’t enough for Disney. It decided to take on Netflix (NASDAQ:NFLX), HBO and others head on with Disney+, and it knocked it out of the park.
After its first day of operation in November, Disney+ had more than 10 million subscribers. And that’s just the beginning. Disney+ is currently adding new subscribers at a rate of 1 million per day.
Certainly, that rate of acquisition won’t last forever. But the more subscribers DIS can bring in at the beginning, the more recurring revenue it’s likely to enjoy down the road.
All of this, plus the two huge revenue generating “bonuses” DIS has up its sleeve make it a stock-market powerhouse that should stay bullish for a long time to come.
Bonus No. 1: Movie Franchises
Disney used to be in the one-and-done movie making business. Snow White had no overlap with Robin Hood, which had no overlap with The Lion King.
Today, Mickey Mouse’s company is taking its cues from the success of the recurring subscription revenue model and is making movie franchises.
For example, Frozen was a smashing success, so why not make Frozen 2 and blow up the box office? Everybody seemed to like Toy Story, Toy Story 2 and Toy Story 3, so why not break out of the bounds of a standard trilogy and make Toy Story 4?
Fans can’t seem to get enough of Star Wars, so why not round out the third (yes, third) trilogy in the series with Star Wars: The Rise of Skywalker? But don’t stop there. Why not create even more spinoffs, like The Mandalorian?
DIS has unlocked the code, or maybe it bought it by acquiring Marvel — the undisputed champion of inter-related movie franchises — to milking as much as possible out of its movie library.
Bonus No. 2: Theme Parks and Hotels
While theme parks and hotels don’t technically fit under the umbrella of monthly or annual subscriptions, the success of DIS’s subscription products is driving park attendance higher and higher.
Just look at the success of the company’s new Star Wars: Galaxy’s Edge at Disneyland and Walt Disney World.
Disney was able to hike admission prices by 8% in the run up to the opening, and attendance remained stable while in-park spending actually increased during DIS’s fiscal fourth quarter.
Plus, Disney’s theme park and hotel business is currently responsible for more than 34% of the company’s revenue and 37% of the company’s earnings.
We expect these numbers to remain strong as DIS’s subscription revenues and earnings continue to climb.
Best Stocks for 2020: Embrace Disney’s Magic
After bottoming out in late-2018 with the rest of Wall Street — a bottom that formed the head of an inverted “head-and-shoulders” bullish reversal pattern — DIS has been gaining bullish momentum.
The stock recently broke above up-trending resistance just above $150, and we expect this up-trending level to serve as support while DIS stock climbs even higher during 2020.
We wouldn’t be surprised to see the stock make a run for $200 before the end of next year. Further, with my “Everyday Income System,” you can earn as much as $1,290 each day the markets are open. It’s an eye-opening trading strategy allowing you to instantly grow your portfolio by selling options instead of buying them. Learn more about my revolutionary system by clicking here.
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