Media giant Disney (NYSE:DIS) reported blockbuster numbers for its year-old Disney+ streaming service at the company’s Investor Day in early December. Wall Street cheered the results, and sent Disney stock up more than 15% on the news.
Specifically, Disney said that Disney+ now has nearly 90 million subscribers. For context, it took Netflix (NASDAQ:NFLX) five years from the launch of its standalone streaming service in 2011 to hit 90 million subscribers. Disney+ just did it in a year.
Sure, the Covid-19 pandemic factors in here. With the physical economy shutdown and everyone forced indoors, consumers rushed to adopt new streaming services, like Disney+. This year has been the perfect operating environment for a new streaming service.
But, the bigger force at play is cord-cutting, and the shift from linear to streaming TV. Disney+ has injected itself into the epicenter of this secular shift, and the weight of evidence today suggests that the streaming service will one day rival Netflix, and have over 500 million paying subscribers at scale.
Considering the robust hypergrowth potential from Disney+, DIS stock looks like a solid buy here. I don’t think the stock is going to take off like a rocket ship, though. It’s too big to do that. And the other moving parts at Disney — parks, studio, media networks, etc — aren’t all that exciting.
But DIS stock will be a slow-and-steady winner over the next few years, and does have near-term upside to over $200 in the next 12 months.
Here’s a deeper look.
Disney+ Is a Winner
Over the next decade, streaming TV will wholly displace linear TV, for its significant content, convenience, and pricing advantages. By 2030, your average household’s “entertainment mix” will include a handful of streaming services bundled together.
Those bundles will not be homogenous. That’s the beauty of streaming TV. Due to the low price point of services, you can pick-and-choose what content you want to pay for. But, it appears increasingly likely that two common denominators in most all household entertainment mixes of the future will be Netflix and Disney+.
Netflix is already well on its way. The platform has over 73 million paying members in the U.S. and Canada. There are about 140 million TV households in those two countries. So Netflix is already at 50%-plus household penetration, with that number steadily climbing.
Meanwhile, Disney+ is also well on its way. The platform’s portfolio of wide-appeal and high-quality content — ranging from family movies, to heartfelt dramas, to science fiction/fantasy thrillers — has already attracted 86.8 million total subs to the platform in just 12 months. This breakneck growth strongly implies that most households value Disney content enough to make Disney+ a “must-have” streaming service, like Netflix.
The long-term implications for Disney+ as a “must-have” streaming service are enormously positive.
There are roughly 1.7 billion pay TV households in the world today. Population growth and urbanization should push that number to 2 billion by 2030. It’s likely that about half of those households shift to streaming TV by 2030. That equals an addressable market of 1 billion streaming households. At an $8 price point and with an unmatched content portfolio, Disney+ could easily convince about half of those households to subscribe. That equals 500 million global paying subs by 2030.
At $8 per month, that equates to nearly $50 billion in annual revenue.
Thus, from where I sit, Disney+ looks like a $50+ billion business in the making — which, of course, is great news for DIS stock.
Slow Growth Elsewhere
Although Disney+ is one of the most exciting hypergrowth platforms in the world today, Disney stock will be hampered over the next few years by sluggish growth in all of its other businesses.
The Parks business will shake off Covid-19 headwinds sometime in 2021, and likely return to normal operations by 2022-23. Still, growth in this business has averaged around 5% to 7% for several years now. Going forward, this tepid growth track won’t change.
Meanwhile, the Studio Entertainment and Media Networks businesses are facing structural challenges.
Movie theaters are facing an existential crisis, and while the industry as a whole won’t go under anytime soon, it will inevitably shrink in the wake of the Covid-19 pandemic. Disney can offset some of this weakness by selling movies direct-to-consumers through its streaming channels. But not entirely, because movie tickets cost per person while on-demand movies at home are priced per household (and, often, there are multiple people per household).
At the same time, linear TV is facing an existential crisis, too. The more Disney+ grows, the more Disney’s legacy media cash-cow business withers away and becomes increasingly irrelevant. Growth in this segment will be challenged for the foreseeable future.
Thus, outside of Disney+, Disney is a conglomerate of a bunch of struggling to mild growth businesses. A lack of firepower from all of these other businesses will offset Disney+ momentum, and ultimately keep DIS stock from going into hypergrowth mode.
Upside for Disney Stock to $200
My modeling suggests that DIS stock has upside to over $200 over the next 12 months, and will remain a slow-and-steady gainer for the foreseeable future. But any hopes of 50%-plus annualized gains are detached from reality.
I see Disney+ as a solid, 15%-plus revenue growth business over the next decade, while the rest of Disney’s businesses will average flattish growth, leading to overall revenue growth rates in the 5% to 10% range throughout the 2020s.
Operating margins will improve, as the streaming business scales and its profit margins dramatically improve. But profit margins everywhere else will either be stagnant or struggle, and therefore, operating margin expansion potential into 2030 is solid but limited.
Overall, mid-to-high single-digit revenue growth should translate into low double-digit earnings growth. Assuming so, my modeling says Disney will net about $19 in earnings per share by 2030.
Based on a 20X forward earnings multiple, that implies a fiscal 2029 price target for DIS stock of $380. Discounted back by 8% per year, that further implies a fiscal 2021 price target of $205.
Thus, DIS stock has good upside potential from here — but not great upside potential.
Bottom Line on Disney Stock
Disney stock is a “safe” winner. The stock will head higher over the next few years thanks to Disney+ ramp, and risks are relatively muted. But the upside reward potential is also limited.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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