The Walt Disney Company (NYSE:DIS) has been on a roller-coaster ride this year. Starting above $148 per share at the beginning of the year Disney stock cratered more than 42% and now is up to $173.94 as of Dec. 15. The stock might be close to being fully valued.
Or is it? After looking more closely, a case can be made for Disney stock to rise another 50%.
In fact, in the past week alone, Disney stock is up almost $20 or almost 13%. As a result, it now trades at some of the highest price-to-earnings (P/E) ratio levels in its history.
Disney Stock’s Historical P/E Valuation
For example, Morningstar reports that the average forward P/E ratio in Disney’s past five years has been 22.65. But right now the average consensus earnings per share (EPS) estimate for Disney stock is $4.77 for its September 2022 fiscal year. That puts it on 36x FY 2022 earnings.
So this is already 59% higher than its historical average. Now, to be fair, analysts expect even higher earnings for the September 2023 fiscal year. That estimate, provided by Seeking Alpha, is for EPS of $5.82.
But this still puts Disney at 30 times earnings three years in the future, or 53% higher than its average historical P/E multiple.
There is always a good reason why a stock gets fully valued. In this case, it appears that it is Disney’s news that the number of streaming customers topped the forecast of 86 million. Moreover, Disney expects the total number of paid subscribers for Disney+ will reach 230 million to 260 million by 2024.
This information came out as a result of Disney’s virtual “direct-to-consumer” (DTC) Investor Day on Dec. 10. These are elaborate marketing events designed to promote the shares. In this case, it worked pretty well for Disney stock. It is up almost $20 since then.
The truth is that if you are going to forecast revenue and earnings three years out, you have to risk-adjust the results. This tends to reduce the valuation.
What Disney Stock Is Worth
For example, if we discount the 2023 forecast EPS by 20%, we get a discount factor of 57.87%. In other words, risk-adjusting the $5.82 by 57.87% results in a present value EPS of $3.37 per share.
That significantly raises the P/E multiple to 51.9x, or twice as high as the company’s normal forward P/E.
This means Netflix will have about 230 million subscribers by the end of 2021, as it gained about 28 million subscribers this year already. So by the end of 2021, it will have the same as Disney’s minimum forecast its FY 2023.
But here is the main point: NFLX stock trades for 57 times forward 2021 EPS. That is a bit higher than Disney’s prevent value 2023 P/E of 52x (see above).
Granted, it could mean that Disney stock could rise another 10% or so to get to 57 times earnings. That would put it on a comparable valuation as NFLX stock. This implies that Disney is worth about 10% more or about $190.60.
It’s All About the Subscribers
However, having thought about this some more, I think there is a devil’s advocate point of view that implies Disney stock is worth more than Netflix.
For example, even though both will have 230 million subscribers, Disney will actually make over 50% more per subscriber.
Here is how I figured this: For one, Disney has 1.81 billion shares outstanding. Therefore, by 2023 with its forecast $5.82 EPS (but $3.37 on a present value basis), its total net income will be $6.1 billion. This is seen by multiplying 1.81 billion by $3.37.
Therefore, dividing $6.1 billion by 230 million subscribers yield $26.53 per subscriber by 2023 for Disney.
But Netflix has just 455.1 million shares outstanding. Multiplying its forecast $9.10 EPS for 2021 by 455.1 million yields $4.14 billion. Therefore, its net income per subscriber is just $18.00 (i.e., divide $4.14 billion by 230 million).
Therefore, Disney might be worth up to 47% more than Netflix since it makes 47.3% more ($26.53) per subscriber than Netflix ($18.00).
This is seen with Disney’s “flywheel” approach to driving its consumers. For example, its content drives people to its theme parks. It intermixes its movie characters into different content themes, movies, toys, parks, and TV series — all creating loyal viewership. It is a superb brand-making company. In other words, its earnings have higher quality per subscriber than Netflix’s.
What To Do With Disney Stock
Disney stock has been on a heater recently. A case can be made that it is worth no more than 10% more, about $190.60 per share. This is based on its historical P/E valuation as well as a cursory comparison with Netflix’s multiple.
But a closer look, using an earnings-per-subscriber model, for every subscriber that Disney acquires, it makes almost 50% more than Netflix. That implies the stock should be at least 47% higher in terms of its P/E, or $255.69.
For simplicity purposes, let’s assume Disney stock is worth 50% more because there is just a 75% probability it will reach that price. On the other hand, let’s guess there is a 25% chance it will rise by just 10%, or $190.60
Therefore, the weighted average expected value price for Disney is $239.42 per share. That means my best guess is Disney stock will rise about 38% over the next year or so. This is when the market will start anticipating the company reaching 230 million subscribers. This is also despite the apparent high level of its price-to-earnings ratio.
To say the least, making a 38% ROI is a great return for most patient investors.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.