Summary- Disney has fallen 14% since its March peak, creating a buy opportunity.
- A combination of legacy and new streaming business means Disney has more long-term earnings power.
- The Wall Street consensus is for 20% total return over the next twelve months.
Since the pandemic hit in early 2020, one of America's most iconic brands, the Walt Disney Company (NYSE:DIS), has gone through a major transformation. During a period when its highest profile segments—theme parks, cruise ships and theaters—were deserted due to lockdowns and closures, its newer, Disney+ video-streaming business thrived, providing investors a strong reason to stay faithful to the House of Mouse.
One of the more surprising turnarounds during this COVID crazy year, has been shares of the world’s largest entertainment company hitting new highs in March 2021 even though the company lost about $2.8 billion in 2020.
The stock has more than doubled from lows set in March 2020, when coronavirus fears tanked the entire market.
Reopening Economy, Decelerating Shares
But as the economy reopens and consumers appear eager to resume their normal lives after a mass vaccination drive in the US and abroad, there are signs that streaming user growth, a key engine of expansion that has propelled the stock higher, is losing some momentum.
In May, Disney+ reported that it had, added 103.6 million customers, short of the 110.3 million projected by analysts. Shares of the Burbank, California-based company have reacted to this deceleration, giving up 15% of their value since hitting a record of high of $203 intraday in early March. The stock closed on Thursday at $175.13, down about 1%.
This bearish spell, in our view, offers a good entry point for long-term investors as the 97-year-old Disney enters another strong phase of growth in the post pandemic world, fueled by its legacy businesses, including theme parks, and the direct-to-consumer streaming service.
There could be some bumps on this road to recovery as the pandemic evolves and the emergence of variants delays the full reopening, but Disney’s diversified business has all it takes to ultimately rebound. Indeed, early signs of this turnaround are already there.
Theme Parks Recovering
At a JPMorgan) investor conference in May, Disney Chief Executive Bob Chapek predicted “low double-digit increases” in park attendance over the next several months. He also added, in a Wall Street Journal report, that the company expects to see the “full benefit of some of these relaxation of guidelines” near the end of its current fiscal year in September.
These projections have further brightened the outlook for Disney in coming months and prompted many top analysts to predict that Disney’s theme park business, which accounted for one-third of the company’s sales before the pandemic, will quickly bounce back to normal.
Wall Street estimates have the company’s combined revenue from domestic and international theme parks returning to growth in the current quarter ending in June, according to Visible Alpha.
They also project park revenue exceeding $4.5 billion in the December quarter, 90% of what the segment averaged in the same period during the five years before the pandemic.
100 Million Subscribers
As for Disney’s streaming business, it has rapidly become one of the major players in the segment, reaching millions of subscribers since it launched in late 2019. The service has already surpassed 100 million subscribers making Disney the most successful of the new entrants into this arena, all trying to grab a share in a market still dominated by Netflix (NASDAQ:NFLX).
Of all the companies to enter the streaming wars, including Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), and NBCUniversal's Peacock service (NASDAQ:CMCSA), Disney+ has significant advantages. It has a vast collection of Disney studios' own animated and live-action movies along with popular television shows on its own cable networks plus properties like the Marvel and Star Wars franchises. Powered by recent, popular titles like “The Mandalorian” and “WandaVision,” Disney+ is on track to meet the company’s own projection of 260 million subscribers by 2024.
The Guardian, in an article published in mid-March, quoted analyst Richard Broughton of Ampre Analysis who said:
“Disney+ has obviously experienced some of the fastest growth seen from a subscription video-on-demand service; kudos to them for establishing themselves as a global force so fast.”
According to Ampre's projections, Disney could overtake Amazon's Prime Video service by 2024, to become the second most popular streaming service in the world.
Chart courtesy of The Guardian
Ampre's Broughton believes that Disney could then knock Netflix out of its top position a year later, during 2025.
Due to its unique advantages, Wall Street analysts are mostly bullish on Disney shares despite its current, pandemic-related challenges.
Chart: Investing.com
According to consensus estimates published on Investing.com, of 27 analysts polled, a significant majority have an “outperform” rating on the stock, with a 20% upside potential.
For investors, who look to technical signals to help make short-term investment decisions, the most popular indicators—moving averages, oscillators and pivots—are offering a mixed picture after the recent market volatility.
Chart: Investing.com
In the ongoing selloff, the stock could slip back to its support level just below $170 that was established in late 2020 after Disney+ crushed expectations on its subscriber growth. If this support level holds, we could see the stock returning to its recent highs.
Bullish Buy Signals
For investors focused on fundamentals, there are plenty of reasons to enter this trade now. JPMorgan is one of the most bullish forecasters for Disney stock, with a price target of $220 per share, 24% above where the stock closed on Tuesday. In a recent note the bank said:
“With its continued digital transformation and recovery of the legacy business, Disney remains our top pick in media in 2021, and we view current levels as a particularly favorable entry point for the long-term investor.”
JPMorgan analysts projects that the movie box office piece of Disney’s business will recover after the second half of the year at which point the company will move back toward exclusive theater releases.
“Disney continues to see improvements at the parks with domestic capacity likely reaching normalized levels in FQ4. Demand remains robust, with customers’ intent to visit the parks returning to 2019 levels at Walt Disney World, a strong sign for the coming quarters,” the note said.
Another reason to remain bullish on DIS is the potential resumption in its payouts which remain suspended since May last year. The company was a long-time returner of capital to investors, doling out $2.9 billion in the fiscal year that preceded the pandemic. But like other companies involved in tourism and travel, since then, Disney has skipped its $0.88-a-share dividend.
Nevertheless, we believe once the impact of COVID-19 subsides and the company has additional clarity on the future cash flows of its businesses hit by the pandemic, it will be able to resume its cash distributions.
Bottom Line
Disney offers a winning combination for long-term investors. Its core business, including theme parks and movie theaters, is returning to growth while its streaming unit is emerging as a powerful contender in the post-pandemic world.