“Please keep your arms and hands inside the ride at all times…2020 is going to be a tumultuous year.”
That is how we started our write up on Disney (NYSE:DIS) last year. Little did we know just how tumultuous a year 2020 was going to be.
Yet here we are. 2020 is behind us — with DIS up more than 20% on the year — and 2021 waits on the horizon. So what do we think now?
We’re sticking with DIS as our favorite stock pick for 2021. The coronavirus pandemic proved that all of the reasons we liked the company before are even more important now.
Subscription-Based Revenue Models
Wall Street loves companies that can tap into the monthly/annual subscription model to generate revenue. Why? Because the revenue is consistent. You know it’s going to keep coming in month after month, year after year.
These companies operate in a variety of sectors. Here are just a few and the way they take advantage of the subscription model:
- Retailers, like Costco (NASDAQ:COST) and Amazon (NASDAQ:AMZN)…annual membership fees
- Application software providers, like Adobe (NASDAQ:ADBE) and Salesforce (NYSE:CRM)…monthly/annual subscriptions
- Media giants, like Netflix (NASDAQ:NFLX)…monthly subscriptions
DIS 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+ and Hulu
DIS started its direct-to-consumer subscription gambit by joining the Hulu group in 2009. There were some growing pains, but Hulu ended up pummeling the subscription services most other individual networks were trying to offer.
In March 2019, DIS became the majority shareholder in Hulu when it bought many of the assets of 21st Century Fox. Shortly after, in May 2019, Comcast relinquished its remaining interest in the company to Disney.
But gaining control of Hulu wasn’t enough for Disney. It decided to take Netflix , HBO and others head-on with Disney+, and it knocked it out of the park.
After its first day of operation in November 2019, the company delighted Wall Street by announcing Disney+ had more than 10 million subscribers.
Fast forward to Dec. 10, when DIS announced it has attracted a jaw-dropping 86.8 million subscribers, and you can see why traders have pushed the stock up to new all-time highs.
And that’s just the beginning. Management believes Disney+ is going to continue adding millions of new subscribers in 2021 as the coronavirus continues to force people into socially distanced activities.
Certainly that rate of acquisition won’t last forever, but the more subscribers DIS can bring in now, the more recurring revenue it’s likely to enjoy down the road.
Movie Franchises & New Releases
The company is driving its Disney+ success by coupling the streaming service with its movie franchises and new releases.
DIS 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. But then the company realized it could capitalize on its own success by making movie franchises.
For example, Frozen was a smashing success so why not make Frozen II?
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, that will only be available on Disney+?
By combining movie franchises and new releases — like Mulan and Soul — with its Disney+ streaming service — that has everything from the Marvel movie catalog to The Simpsons on it — DIS has found the holy grail of subscription-based entertainment revenue models.
Theme Parks and Hotels
Now, it’s important to remember that DIS is trading near its all-time highs at a moment when Disneyland, and most of the company’s other theme parks, are closed. Walt Disney World in Florida is open to a reduced number of visitors, but theme park revenues are nowhere close to what they were before the coronavirus pandemic.
We expect this to change this year as the various coronavirus vaccines become available and state governments begin to ease their restrictions.
Just imagine the amount of pent-up demand there is to go see company’s new Star Wars Galaxy’s Edge area at Disneyland and Walt Disney World. In a post-pandemic world, people will be happy to pay the ever-rising prices for admission and in-park purchases.
Before the pandemic, DIS’s U.S. and international theme park and hotel business was responsible for more than 34% of the company’s revenue and 37% of the company’s earnings. If that segment of the business can bounce back to those levels in 2021, the sky’s the limit for DIS stock this year.
Bottom Line on DIS Stock
After bottoming out in March 2020, DIS began clawing its way back and eventually rocketed higher at the end of the year.
The stock recently broke above the up-trending resistance level it has been interacting with since early-2019. We expect this up-trending level to serve as support while DIS climbs even higher during 2020.
We anticipate DIS will break above $200 before the end of the year.
On the date of publication, John Jagerson & Wade Hansen did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
John Jagerson & Wade Hansen are just two guys with a passion for helping investors gain confidence — and make bigger profits with options. In just 15 months, John & Wade achieved an amazing feat: 100 straight winners — making money on every single trade. If that sounds like a good strategy, go here to find out how they did it.