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Disney is Firing on All Cylinders

Posted on Tuesday, December 10th, 2019 by Chris Markoch

Disney is Firing on All Cylinders

Disney (NYSE:DIS) stock is up nearly 40% in 2019. And I believe it’s about to go even higher. For much of 2019, the story around Disney has focused on the launch of its streaming service, Disney+. Disney stock started to climb in late March as investors began to price in the effect that this new revenue stream would have on Disney’s business. But for all the fanfare surrounding this new service, that’s not the only thing that should have investors excited.

In an earlier article, I wrote that the whole of Disney was greater than the sum of its parts. As 2019 comes to a close investors are coming to see that Disney has had a plan all along and they are executing it flawlessly.

Disney is delivering one box office smash after another

The rise of original content from companies like Netflix (NASDAQ:NFLX), Amazon (NASDAQ:AMZN) and others has put a risk premium on the film industry. Studio executives are less willing to take a risk on films that aren’t going to be “bankable”. But bankable means something different than it did 20 years ago. It’s not enough to cast a well-known actor or actress, sit back and watch the profits come in.

To the delight of moviegoers (and maybe the consternation of film critics) formulas work. So the Marvel Universe continues to expand even as Avengers: Endgame brought an end to the Avengers part of the franchise. This fall has seen the launch of Frozen 2 and just in time for Christmas the latest (and supposedly last) Star Wars movie Star Wars: The Rise of Skywalker will be released.

The common denominator for all those films is that they were made by Disney. In no small part they are the reason Disney’s box office receipts have gone over the $10 billion mark this year. This not only easily tops last year’s previous record of $7.6 billion, but it may get a little end-of-the-year surge from The Rise of Skywalker (if not Baby Yoda).

And speaking of Baby Yoda

The launch of Disney+ has been an overwhelming success. The much-anticipated service added 10 million subscribers in one day after launching on November 12. The blowout launch was due in no small part to The Mandalorian, an original series based on the Star Wars franchise that introduced the character of Baby Yoda. But consumers were also connecting with the franchise on an emotional level as it hit nostalgic notes by reviving many old favorite TV series.

This has caused several analysts to upwardly revise their forecasted subscriber base for the end of the year. Credit Suisse now projects Disney+ will reach 20 million subscribers up from 14.3 million.

And an analyst from Rosenblatt, Bernie McTernan is forecasting 21 million subscribers by the end of the calendar year. McTernan is also forecasting 35 million subscribers by the end of Disney’s fiscal year in September 2020. In concert with raising his estimate for subscribers, McTernan also raised his price target from $170 to $175. That would reflect about a 20% increase from the stock’s current level.

But are analysts getting ahead of themselves? After all, if DIS stock was pricing in a successful launch, is a “more successful” launch worth 20% more?

Disney is executing a virtually flawless plan

As most investors know, in 2019 Disney+ was a cost to the House of Mouse, not a driver of earnings. In the meantime, what investors are beginning to realize is that the company’s film and theme parks divisions were doing the heavy lifting, and excelling on their own merits.

In their most recent earnings report, Disney reported an 11% increase in operating income for parks, experiences, and products. That $6.76 billion was still below Disney’s media networks, which brought in $7.48 billion. However, that division only grew by 2%. And by the end of Disney’s fiscal year in 2024, analysts are projecting park revenue to surpass $10 billion. This means that theme parks will still be a major source of revenue even as the streaming service becomes a significant contributor.

It’s a plan that speaks to the omnipresence of Disney and their nearly unmatched ability to make a connection with their target audience. In marketing terms, Disney is very sticky. And there’s no evidence of that changing anytime soon.

There are very few sure things in investing. But with a low entry price for Disney+, a pipeline of blockbuster movies, and theme parks that tie the Disney experience together, Disney stock may actually exceed its elevated expectations. I wouldn’t bet against it.


Companies Mentioned in This Article

CompanyCurrent PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Netflix (NFLX)$353.16flatN/A85.51Buy$379.94
Amazon.com (AMZN)$1,861.64flatN/A82.45Buy$2,193.67

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