Disney’s (DIS) stock is +72% since my April 12, 2020 buy recommendation. I am again endorsing it as a buy. The rapid growth of Disney+ explains why DIS has now higher valuation ratios than Netflix (NFLX). Disney’s FQ3’s revenue of $17.02 billion (+44% Y/Y) beats street estimates by $260 million. GAAP EPS of $0.50 beats by $0.19. Launched only in November 2019, Disney+ now touts 116 million paying subscribers. Including Hulu and ESPN+, Disney now has 174 million streaming paying customers. The Mickey Mouse empire is on track to close the gap against Netflix’s 207 million subscribers.
Go long on DIS now because it is still trading notably lower than its recent 52-week high of $203.02.
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It took 10 years for Netflix to reach 100 million subscribers. Disney+ took only 16 months to do the same thing. This swift ascent of Disney+ means Disney is a major beneficiary of the fast-growing $150 billion/year online streaming industry. The 18% CAGR of online streaming can obviously boost Disney’s 3-year CAGR of 3.17%. The tactical partnership with Amazon (AMZN) could help Disney+ end 2021 with 150 million subscribers. Amazon Music is recruiting subscribers by offering free 6 months of Disney+.
Amazon Music is now available here in the Philippines. We are Spotify (SPOT) subscribers but we will switch to the $7.99/month Amazon Music Unlimited plan because it comes with free 6 months of Disney+. Yes, we can watch Disney+ here using Psiphon 3 and other VPN apps. I have an 8-year-old daughter and Disney+ content is best for her.
Disney is allocating at least $14 to $16 billion per year to produce original content for Disney+, Hulu, and ESPN+. This is almost on par with Netflix’s 2021 budget of $17 billion for original content production. Disney is also affluent enough to aggressively expand into more countries this year. At the moment, Disney+ is only available to around 50 countries.
Original TV shows and movies will determine how fast Disney+ can match Netflix’s 207 million subscriber count. The rapid growth of Disney+ is definitely why Netflix is expanding to streaming video games. Netflix’s management team decided its exponential growth is harder to sustain because of Disney+. Disney also touts a robust balance sheet and net operating cash flow of $4.6 billion. Disney has the financial muscle to finance its paid streaming video services.
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The total debt of The Walt Disney Company is almost $56 billion. Disney still has a credit rating of A- from Fitch. Banks and other lenders will extend loans to Disney anytime. Third booster shots of COVID-19 vaccines will eventually result in Disney re-opening all of its theme parks. The theme parks segment of Disney has returned to profitability in Q3.
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Expected Growth In Streaming Makes Disney Expensive
The Quant Rating AI algorithm of Seeking Alpha also has a Very Bullish rating for Disney’s stock. DIS is now the highest-rated stock in Seeking Alpha’s Quant rankings of the Movies & Entertainment industry. NFLX is only ranked 10. Quantitative factors have elevated Disney above Netflix. Bullish investors have collectively pushed DIS’ forward non-GAAP P/E valuation to above 77.
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The chart above says the majority of investors now see Disney as the new growth stock of streaming. Growth potential is the no. 1 factor when evaluating the investment quality of companies. Institutional and retail investors gave DIS a TTM GAAP P/E valuation of 289.78. This is significantly higher than NFLX’s 53.46. The investing public did this because they decided that Netflix’s growth has peaked while Disney is just starting to rise. The much higher forward valuation of DIS is in spite of it having lower profitability stats than NFLX.
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Going forward, investors are highly confident that Disney’s streaming platforms will eventually deliver higher average revenue per user or ARPU. At the moment, Disney’s sprint race toward catching up with Netflix burdens it with low ARPU. The average ARPU of Netflix subscribers is higher than $11. Disney+ and ESPN+ are only $4.16.
The priority, for now, is for attracting more subscribers. Disney is offering budget-friendly monthly plans for Disney+ so it can quickly hit 150 million or 200 million subscribers. After it gets enough loyal customers, Disney will likely jack up monthly subscription fees from $8 to $10.Going forward, Higher ARPUs from Disney’s 4 streaming platforms can help the company deliver annual EPS of $4.0 or higher. The closure of theme parks and movie cinemas during this cinema seriously derailed the EPS history of Disney. The pandemic is not going to be a permanent thing. Two or three years from now, Disney will again deliver annual EPS numbers higher than $4. The consensus projection is that within two years, Disney will achieve $5.08 annual EPS.
DIS Stock Forecast: Conclusion
We pay high prices for pandemic-affected firms like Disney because we believe in their long-term viability/prosperity. The pandemic hurts the cinema movies and theme park segments of Disney. On the other hand, the pandemic is a strong tailwind for Hulu, Disney+, and ESPN+. Stay-at-home entertainment keeps people safe from the new variants of COVID-19. The more people that get hooked on Disney+, the faster Disney can bounce back to delivering quarterly EPS of $1 or higher.
My 1-year price target for Disney is $208. This is slightly lower than TipRanks’ average PT of $212.75. The monthly technical indicators and moving averages are also endorsing DIS as a Strong Buy. Don’t be scared of Disney’s high valuation ratios. The stock market has fallen in love with the future profits from Disney+. Go long on DIS now.
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The high investor enthusiasm for Disney’s stock is shared by I Know First. The 1-year trend score of DIS is 121.74. The stock prediction AI algorithm of I Know First is confident that Disney’s stock has more upside potential within the next 12 months. Perhaps DIS will again trade above $200 before October comes.
Past Success With DIS Stock Forecast
I Know First has been bullish on Disney’s shares in past forecasts. On our July 22, 2020 premium article, the I Know First algorithm issued a bullish DIS stock forecast. The algorithm successfully forecasted the movement of Disney’s shares on the 1 year time horizons. DIS’s shares rose by 47.98% in line with the I Know First algorithm’s forecast.
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