Amazon (NASDAQ:AMZN) carries a market capitalization of $1.56 trillion, about 4x last year’s sales of $386 billion. But when you look at Disney (NYSE:DIS) stock, the company is worth $375 billion, or 5.4x fiscal 2020’s revenue of $65 billion.
Call it a trick of the light. Disney’s fiscal year ends in September. DIS stock should do much better this year as theme parks reopen. But it speaks to the confidence investors now have in the company’s future, based largely on the company’s public statements.
Those statements start with one number, 100 million. That’s how many households now subscribe to Disney+, the company’s streaming service. Management says it will reach 230 million 260 million by the end of 2024. Netflix (NASDAQ:NFLX) has about 209 million subscribers worldwide.
Crossing the Streaming Chasm
Analysts now believe Disney will easily cross the chasm between today’s cable and broadcast business models and streaming, where customers buy from content owners directly. The assumption is that this new model will be more profitable in the long run.
But is it? Netflix brought just 11% of revenue to the net income line in 2020. Operating cash flow in the fourth quarter was negative. Before the pandemic, Disney was bringing one-quarter of its “linear network” revenue to the net income line. That revenue is on a long-term decline.
Even now Disney is losing money on streaming. It blames start-up and advertising costs for the fact that for every $5 that came in last quarter, almost $6 went out.
But start-up and ad costs aren’t why Disney is losing money on streaming. Price is why. Disney+ costs $7 per month, although that will soon rise to $8. Netflix has a variety of pricing plans that start at $9 and rise to $18. Analysts assume Disney will be able to dramatically raise prices and will continue to gain ground.
That’s a big assumption.
Why Buy DIS Stock?
The best reason to buy DIS stock today isn’t streaming. It’s the promise that its theme parks and cruise line could soon be setting sail again on an ocean of profits.
Before the pandemic Disney brought one-third of $7.5 billion in quarterly revenue to the net income line. There is enormous pent-up demand in the vacation market. Walt Disney World in Florida is already sold out for spring break. Disney now operates 12 parks in six locations. It has nine additional resorts and there are four cruise ships waiting for the all-clear to print money.
This has analysts pounding the table for Disney stock. This despite its price doubling in the last year, even while results have deteriorated. Disney will outstrip Netflix and fly away with its vacation revenue, goes the story.
Disney’s image is also built on “tent pole” movies, comic book superheroes and spin-offs like its successful WandaVision show. Before the pandemic about 16% of its revenue came from studio entertainment. Might that come back too?
The Bottom Line
Investors are betting that a “new normal” of vacations, movies and streaming growth justifies paying 5.4x revenue for Disney. In a normal year it can take 20% of revenue to the net income line. Add anticipated growth to those margins and it’s a golden dream. Disney has always been great at selling a brighter tomorrow.
But now Disney must execute and despite Tipranks rating the stock a strong buy, the average price target is $205, just 5% above where it’s trading now.
The point is that there is a lot of optimism built into DIS stock. Any slips will be sorely punished.
At the time of publication, Dana Blankenhorn directly owned shares in AMZN. He did not have (either directly or indirectly) positions in any of the other securities mentioned in this article.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack https://danafblankenhorn.substack.com/.
