Disney’s streaming growth can double its stock

Disney’s fourth-quarter results show that its streaming business is finally picking up steam. While the company’s theme parks and cable television businesses were under pressure, its streaming business performed well. In the most recent quarter, the direct-to-consumer segment posted revenue of $5.8 billion, up 15% year-over-year, while operating profit rose to $321 million, compared to a loss of $387 million in the same period last year. Despite this, Netflix still holds the streaming crown. The company’s stock is up nearly 90% this year, far outpacing Disney’s 29% gain, and its market cap is a massive $390 billion, nearly double the $200 billion Dollars from Disney. But here’s the interesting part. Disney’s direct-to-consumer businesses actually aren’t far behind Netflix in scale. Disney generated nearly $23 billion in revenue last fiscal year, compared to Netflix’s estimated $39 billion in streaming revenue for the current fiscal year. This gives us reason to believe that Disney’s overall valuation may be underestimated given its streaming strengths. By the way: What happens to that? controversial AI Stock Super Micro Computer?

It is noteworthy that DIS shares have underperformed the broader market in each of the last three years. The stock’s return was -15% in 2021, -44% in 2022 and 4% in 2023. In contrast, the Trefis High Quality Portfolio is less volatile with a collection of 30 stocks. And it has outperformed the S&P 500 every year in the same period. Why is that? As a group, the stocks in the HQ Portfolio offered better returns with lower risk compared to the benchmark index. Less of a roller coaster ride, as the HQ portfolio performance metrics show. Given the current uncertain macroeconomic environment around interest rate cuts and multiple wars, could DIS face a situation similar to that in 2021, 2022 and 2023? perform worse than the S&P in the next 12 months – or will there be a recovery?

Disney’s streaming business is doing well

Disney has poured significant resources into its streaming operations over the past few years, and it’s finally starting to pay off. Disney+ added 4.4 million repeat customers in the last quarter, excluding the cheaper Disney+ Hotstar service in India. Disney had about 123 million subscribers to its core Disney+ service, up 9% from last year, while its Hulu service had about 52 million subscribers, up about 7% from last year. In addition to subscriber growth, Disney’s strategy of increasing prices was also a key driver of revenue growth. For example, the price of the ad-free Disney+ plan rose $2 to $16 in October, following a similar increase in 2023.

Disney’s ad-supported division also appears to be thriving. About half of Disney+ subscribers in the US now opt for the ad-supported version, with 37% of active subscribers currently on these plans. In fact, Disney says it has intentionally pushed users toward ad-supported plans by making ad-free options more expensive, and there are good reasons for that. The broader streaming industry has doubled down on ad-supported tiers because they bring in more revenue per user by generating revenue from both subscription fees and advertising dollars. Additionally, advertising prices could be favorable for Disney because of the company’s ability to achieve better audience targeting and because Disney offers high-quality, family-oriented content.

Disney vs Netflix

Netflix reported that it had 283 million subscribers worldwide in its most recent quarter, a 14% increase from a year ago due to its crackdown on account sharing and its advertising push. By comparison, Disney has about 175 million total subscribers across Hulu and core Disney+ offerings, representing slower growth of 8% compared to last year. Netflix’s average revenue per user is also more attractive, at $11.60 worldwide, compared to $7.30 for Disney+, although Disney’s Hulu service has a higher average monthly revenue of about $12.50 .

However, Disney’s streaming activities are hardly as profitable as Netflix’s. Direct-to-consumer operating margins were just 5% for Disney last quarter, while they were a solid 30% for Netflix. This difference in profitability and scale is reflected in the valuations of the two companies. Netflix trades at about 39 times estimated 2025 earnings, while Disney, including its other media and theme park assets, is valued at a more modest 21 times. Although Disney stock appears to offer good value in our opinion At $900, Netflix stock isn’t worth the risk

Streaming Revaluation Could Double Disney Stock

Although Netflix is ​​seeing stronger momentum compared to Disney, we believe Disney has tremendous potential thanks to its extensive library of intellectual properties, which includes Pixar and its legacy animation assets as well as cult franchises such as Marvel and Star Wars . To close the valuation gap, Disney needs to continue to grow its streaming margins while improving its subscriber numbers. We believe this is possible.

How come? In terms of subscriber and revenue growth, Disney has been driving paid sharing. The option launched in the United States in September and allows members to add a user outside of their household for an additional fee starting at $7 per month. In comparison, Netflix introduced this option in the US in May 2023 and achieved great results. We also saw similar improvements at Disney.

As for margins, Disney’s marketing costs for its streaming business are also falling as the platform matures, and its bundled offerings will likely help keep churn under control. Offering Disney+, Hulu, and ESPN+ together for just $17 per month has increased engagement with the service, improved customer retention, and reduced churn. We also believe that the investments Disney is making in its streaming business will have long-term value. Why so? Unlike Netflix, which monetizes its content investments solely through monthly subscription fees, Disney has a much larger value chain given its cinema business, theme parks, merchandise and licensing businesses. Unlike Netflix, which focuses heavily on one-off shows, Disney’s content investments are likely to be much more sustainable given its iconic franchises.

While it might take a while for Disney to match Netflix’s efficiency and execution, recent progress is encouraging. Disney’s streaming revenue rose about 14% year-over-year to $22.7 billion in fiscal 2024. If revenue increases by about 12% in each of the next two years, that could result in revenue of about $28.59 billion by fiscal 2026. If Disney can increase its streaming operating margins to about 25% (compared to about 30% for Netflix), that would result in operating profit of about $7.1 billion. Now Netflix trades at about 39 times its estimated 2024 operating income. If investors value Disney’s streaming business at about 30 times operating profit, about 25% below what they currently value the Netflix business, that would result in an enterprise value for Disney’s streaming business of nearly $210 billion. Dollars result. That’s almost all of Disney’s current market cap. But Disney’s business encompasses much more: theme parks, television and sports entertainment, which brought in total revenue of $67 billion in its most recent fiscal year. If we add these in, it’s not hard to imagine Disney stock doubling from current levels. Check out our analysis Disney’s review to take a closer look at what drives our current Disney price estimate. Also check out our analysis Disney earnings to take a closer look at the company’s main sources of income and their development.

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