Many would think that the stock of entertainment giant Disney (NYSE:DIS) is over and done with. However, the company is in the middle of a transition from linear TV to streaming, which I believe is a bullish sign.
While the streaming giant Netflix (NASDAQ:NFLX) has gained 40% year-to-date, Disney has massively underperformed and is down 4% over the same period. The question is, will Disney stock give similar returns to Netflix once Disney starts to monetize its subscriber base like Netflix?
Interestingly, even if Disney does not match up to Netflix’s growth, I believe it’s worth buying anyways due to the factors I will explain in this article.
In May, I highlighted in an article that Netflix’s growth initiatives, including the monetization of password sharing and its growing advertising revenues, may uplift the company’s profitability. To my surprise, Netflix’s turnaround manifested much faster than my expectations, as you can see in the chart below.
Now, let’s take a look at Disney to see what makes it attractive at current levels.
The Countless Struggles at Disney
Disney’s stock price has been battered over the past two years due to numerous challenges facing the company. The challenges include lesser footfalls at the U.S. Disney theme parks due to a deteriorating economy, unimpressive direct-to-consumer subscriber growth, reduced box office film revenues, an overstretched actors and Writer’s Guild strike, and high debt levels.
Further, the company is truly in the middle of a strategic turnaround. There has been news that Disney could potentially sell off its traditional TV and cable businesses, including ESPN, Freeform, and ABC. In contrast to the media businesses’ more than 50% contribution to operating profits in the past, CEO Iger recently classified its traditional TV assets as “non-core” due to the inevitable near-extinction of cable TV.
Separately, Disney could also buy the remaining 33% of Hulu (it owns 67% of the company). Perhaps Disney plans to use the sale proceeds from the cable business to buy the rest of Hulu. At least, that will mean that the company did not have to increase its debt levels further to fund Hulu.
Huge Subscriber Base Could Make Disney a Potential Takeover Candidate
Disney is one of the industry leaders in the streaming space and has built a huge subscriber base over the past couple of years. It owns Disney+ (with 157 million subs), ESPN+ (25 million subs), and holds a major stake in Hulu (48 million subs). Years of capital investments are now expected to convert to earnings growth as Disney begins to utilize its gigantic subscriber base.
Notably, Disney has offered streaming to its subscribers at very low prices for years. The company is now making significant efforts to monetize its subscriber base by executing long-due price increases and striking advertisement deals. Likewise, the company expects streaming to achieve profitability by the end of Fiscal 2024. For reference, the streaming segment incurred an operating loss of $1.7 billion during the first half of Fiscal Year 2023.
Digging deeper into the streaming industry, there are two main issues. First, production costs are significantly higher, often exceeding the resulting revenues. Second, there is a surge of production happening across the streaming industry, leading to a saturated market.
Positively, however, the streaming loss at Disney is shrinking, coming in at $659 million during the second quarter. In its upcoming Q3 earnings, expected to be released on August 9, investors will closely watch the streaming losses trend and management’s guidance regarding future profitability.
Interestingly, Wall Street analysts expect Disney’s annual EPS to more than double to almost $8.50 at the end of Fiscal 2027 compared to $3.75 expected at the end of the current fiscal year ending in September.
If the company is successful in meeting its profitability plans, the stock will likely reward investors. If it doesn’t, there’s a chance that the company will be acquired by bigger players looking for such an impressive subscriber base.
CEO Iger has already expressed that a major chunk of its TV networks could be up for sale. ESPN especially has a huge fan following and could be bought over by tech giants like Apple (NASDAQ:AAPL). Iger recently got an extension of his tenure as a CEO for another two years, and there are rumors which indicate that the entire company could be up for sale, not just its TV assets.
Disney is Trading at a Relatively Cheap Valuation
Despite poor stock price performance in the recent past, Disney stock trades at a reasonable valuation (a P/E of 26.9x). However, when compared to peers like Netflix (with a P/E of 46.7x), it is trading at a significant discount. Further, Disney is also trading at a discount to its five-year P/E average of 28.5.
The discounted valuation potentially presents a good buying opportunity for Disney, given a robust subscriber base leading to profitability in the coming years.
Is Disney Stock a Buy, According to Analysts?
As per TipRanks, analysts are cautiously optimistic about the stock, giving it a Moderate Buy consensus rating, which is based on 13 Buys, six Holds, and two Sells. Additionally, Disney’s average price forecast of $115.72 implies 34.1% upside potential.
Conclusion: Disney Stock is Attractive for the Long Term
While the challenges persist at Disney in the short term, there is a likelihood that the stalwart entertainment company can turn its profits around in the long run once macroeconomic headwinds normalize. Amusement park revenues may return to their past glory, and subscriber-base monetization plans will likely play out as planned by management.
Moreover, even if none of that works, I believe there is a high likelihood of the company being acquired by larger giants seeking to diversify and leverage Disney’s brand name and subscriber base. Taking both possibilities into account, I am bullish on the stock at current levels.
