The Walt Disney Company (NYSE:DIS) reported stellar fiscal first-quarter earnings on Feb. 9. This covered the period ending Jan. 1. Based on its strong results and outlook, DIS stock has a good chance of moving higher if its fiscal second-quarter earnings repeat this performance.
In fact, Disney itself is very positive about its own outlook. For one, the company continues to project that its Disney+ subscriber base will grow to between 230 million and 260 million by the end of fiscal 2024. This is what management said during their fiscal Q1 earnings conference call on Feb. 9.
That is about twice its nearly 130 million subscribers by the end of this most recent quarter. Therefore, this implies that at the midpoint, subscribers will grow 88.5% over two years. This results in a compound growth rate of 37.3% each of the next two years.
That is also probably a pretty good indication that revenue would grow by that rate as well, or higher, assuming price increases.
Where This Leaves Disney
One of the main takeaways from the conference call was the company continues to say that its streaming service will reach breakeven by fiscal 2024. That refers to the year ending Sept. 2024, or ten quarters from now (i.e., two and a half calendar years).
In other words, its streaming service has to almost double in size in terms of subscribers before its product line in streaming can become profitable. That is a tall order.
However, other aspects of Disney’s earnings will pull it through until then. For example, its Media and Entertainment Distribution division makes up two-thirds of total revenue. But most of the company’s growth came from the Disney Parks, Experiences, and Products division this quarter (over 100% gain).
The Media division had revenue growth of 15% year over year (YoY) but produced almost half of the dollar revenue gains. The rest came from its Parks, Experience, and Products division, which doubled revenue YOY.
Disney CEO Bob Chapek said he expects stronger growth in the second half for Disney. A good portion of that will come from robust growth in its theme parks division, as most of its locations are now open.
However, because of all the content investments and its parks reopening, Disney’s free cash flow turned negative during the quarter.
Disney reported an outflow of negative $1.19 billion in its fiscal Q1.
By contrast, last quarter Disney made positive FCF of $1.522 billion. That is a $2.7 billion swing in three months. It reflects the huge amounts Disney spent this quarter to attract new viewers at Disney+, Hulu, and ESPN.
What This Means for DIS Stock
Analysts are still positive on DIS stock, despite the negative free cash flow and streaming losses. For example, the average price target at TipRanks from its survey of 19 analysts is $193.89 per share as of Feb. 10. This is 33% over today’s, March 3, price of $145.57.
Seeking Alpha has a survey of 29 analysts, and their result is similar. The average price target is $191.42 from these analysts. That represents a potential gain of 31.5% over today’s price.
Basically, then, analysts are extremely positive on DIS stock. They expect the company’s strong finances and its growing subscriber base, along with its entertainment park revenue recovery to push the stock higher.
At today’s price, Disney trades for just 25.9 times the Sept. 2023 year-end forecast earnings per share (EPS) of $5.61, according to Seeking Alpha. That is based on 24 analysts’ forecasts. This is well below the Morningstar average forward price to earnings (P/E) multiple of 37 times for the past five years.
That implies that the $5.61 EPS should produce a price target of $207.57 per share. This is 42.6% over the price today. If it takes two years for that to happen the average annual compound return will be 19.4% each year. For most people that is an excellent ROI.
On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
