How Disney stock can double

Disney’s (NYSE:DIS) streaming business has gained momentum in recent quarters. While streaming giant Netflix (NASDAQ:NFLX) remains the dominant player in the streaming space – with shares up over 85% this year, compared to Disney’s 31% gain, and a market cap that stands at surging past $380 billion, about double Disney’s $200 billion, Disney is quietly making strides in the streaming space that investors shouldn’t overlook. Disney’s direct-to-consumer operations aren’t all that far behind Netflix in terms of size. Disney’s DTC operations generated nearly $23 billion in revenue in the fiscal year ended September 2024, compared to Netflix’s estimated streaming revenue of $39 billion for the current fiscal year. Disney’s streaming services have over 175 million subscribers, while Netflix’s has about 283 million, and the business is slowly becoming more profitable. This gives us reason to believe that Disney’s overall valuation may be underestimated given its streaming strengths. So can streaming increase Disney stock by roughly double in the coming years? Yes. Here’s how.

Disney’s streaming revenue rose about 14% year-over-year to about $23 billion in fiscal 2024. If revenue increases by about 12% in each of the next two years, that could result in revenue of about $28.6 billion by fiscal 2026. If Disney can improve its streaming operating margins to about 25% from about 5% currently, that would result in operating profit of about $7.1 billion. We think this is possible because Netflix has an operating margin of around 30% and Disney is still in the early stages of monetization. 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 as much as Disney’s entire current market capitalization. But Disney’s business encompasses much more, including 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. Below we provide an overview of how Disney’s streaming business has performed and how it compares to Netflix. On a side note, you should do this too Sell ​​Nvidia and buy AMD shares?

It is noteworthy that DIS shares have performed worse than the overall market in each of the last three years. Stock returns were -15% in 2021, -44% in 2022 and 4% in 2023. In contrast, the Trefis High Quality (HQ) 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.

New subscribers and price increases increase profitability

Disney has poured significant resources into its streaming operations over the past few years, and it’s finally starting to pay off. 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. 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.

Now Netflix is ​​still ahead of Disney in the streaming race. The streaming specialist reported that it had 283 million subscribers worldwide in the last quarter, a 14% increase year-on-year, driven by 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 (ARPU) 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 US dollars has. Although Disney stock appears to offer good value in our opinion At $900, Netflix stock isn’t worth the risk

Disney stock could be valued higher

While Netflix is ​​seeing stronger momentum compared to Disney, we believe Disney has tremendous potential due to its extensive library of intellectual property, 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 due to several factors.

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 launched this option in the US in May 2023 and achieved solid results. We also saw similar improvements at Disney. Additionally, Netflix has indicated that it will stop releasing subscriber numbers starting in 2025, an indication that the company expects subscriber growth to slow. Disney, on the other hand, could continue to benefit from its paid sharing as well as its broader range of offerings such as Disney+, Hulu and ESPN+.

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. 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.

We value Disney stock at $130 per share. 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.

(1) Return as of November 28, 2024
(2) Cumulative total returns since the end of 2016

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.