Walt Disney Company (DIS) had a day for the history books as it closed Friday's session at $175.72, its highest price ever, and a gain of 13.6%. At one point in the day, the stock even hit $179.45. DIS soared after the company's presentation at its Investor Day event Thursday.
As you may remember, I wasn't as bullish on DIS earlier this month, as I believed the loss of its higher-margin movie and theme park revenue during the pandemic was hurting the company. But now, I am a believer in the potential of its streaming service to be its driving growth catalyst.
The Thesis to Buy
The company announced that its immensely popular streaming service, Disney+, now has more than 86 million subscribers in the four-hour event. That was initially supposed to be its five-year target (60 million to 90 million). It appears that while the pandemic is hurting its theme parks and movie launches, it's driving more people to the streaming service.
Let's put that 86 million in context. It took Netflix (NFLX) five years from the launch of its streaming service to reach 90 million subscribers. Disney+ got there in one year. The company also raised its outlook for subscribers to a range of 230 million to 260 million by 2024. If you include Hulu and ESPN+, the range is between 300 million and 350 million subscribers.
DIS is also raising the price of its service from $6.99 a month to $7.99 per month in March. This will help finance all the content it plans on producing over the next couple of years. The company expects to spend between $8 billion and $9 billion on Disney+ content in 2024. This puts it in the same league as NFLX, as the streaming giant has had a dominant position due to its ability to spend massive amounts of money on content.
The company announced it's working on 10 Star Wars series and 10 Marvel series that are expected to debut on Disney+ over the next couple of years. One notable series will be Obi-Wan Kenobi, which will have Ewan McGregor and Hayden Christensen reprise their roles as the title character and Darth Vader, respectively. This show is likely to be as popular as the massive Disney+ hit, The Mandalorian.
DIS will also make 15 Disney and Pixar animated shows and feature films for the streaming service. The company also announced that it would be launching in Eastern Europe, South Korea, and Hong Kong in the next year.
If this news was enough, consider the revenue it will generate from its parks, cruises, and movies once the pandemic is over. The one aspect of DIS's business model that I have also loved is that it runs through its intellectual property (IP). Unlike NFLX and other streaming services, DIS will be able to utilize its own IP to create series and even movies based on its characters. The company can then build rides for its theme parks and sell merchandise based on these characters.
The stock was even upgraded a day before the investor event as Wells Fargo analyst Steven Cahall upgraded the stock to "Overweight" from "Equal-Weight." He also raised his price target from $155 to $182. He believes that DIS's transformation into a streaming company will set it up for future growth.
The Numbers
The company is expected to grow sales next year by 20.3%. Earnings are expected to rise an even higher, 172.9%. DIS had $17.9 billion in cash as of the end of the last quarter, which was up considerably from $5.4 billion in the same quarter last year. While the company's long-term debt is high at $52.9 billion, its current ratio is 1.3, indicating that it has enough liquidity to meet short-term demands.
The stock is rated a "Strong Buy" in our POWR Ratings service. In fact, it holds a grade of "A" in every component that makes up the POWR Ratings, including Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank. It is also ranked #1 in the Entertainment - Sports & Theme Parks industry.
The Verdict
While the stock is up quite a bit this month and could see some pullback on Monday, I have changed my tune and now view the stock as a "Buy" from a fundamental standpoint. The company has been the dominant media company for decades, and its streaming service, Disney+, can not only bring it to the next level but sets it up to generate substantial revenue from its parks and movies once the pandemic is over.
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About the Author: David Cohne
David Cohne has 20 years of experience as an investment analyst and writer. Prior to StockNews, David spent eleven years as a Consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers.
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