How Streaming Is Driving Disney Stock’s Revival

Disney (NYSE:DIS) streaming turnaround appears to have firmly taken hold. The division helped Disney deliver a strong set of Q4 FY’24 results, with revenues growing 6% year-over-year to $22.6 billion, while adjusted earnings jumped 39% to $1.14 per share. These gains came despite headwinds from declining theme park and cable TV revenues, underscoring the streaming segment’s growing importance to Disney’s bottom line. Disney stock remains up by over 11% over the last two trading days. So what’s driving this streaming surge, and could it pave the way for a sustained rally in Disney’s stock price? As an aside, which big tech stock should you pick? Google Stock vs. Amazon

Disney has devoted considerable resources to its streaming operations in the last few years, and it’s finally starting to pay off. Over the last quarter, the direct-to-consumer segment brought in $5.8 billion in revenue, a 15% increase year-over-year, while operating profits soared to  $321 million, compared to a $387 million loss it reported during the year-ago period. Disney+ added 4.4 million core subscribers last quarter, excluding the lower-priced Disney+ Hotstar service in India. In comparison, it added 700,000 new subscribers in the previous quarter. This is also not too far off from the 5.1 million subscribers streaming bellwether Netflix (NASDAQ:NFLX) added over the last quarter. Besides subscriber growth, Disney’s strategy of raising prices has also been a key driver of revenues. For instance, the ad-free Disney+ plan saw a $2 price hike to $16 in October, following a similar increase in 2023.

Disney’s ad-supported tier also appears to be thriving. About half of U.S. Disney+ subscribers now opt for the ad-supported version, with 37% of active subscribers currently on these plans. In fact, Disney says that it has been intentionally pushing users toward ad-supported plans by making ad-free options more expensive and there’s good reason for this. The broader streaming industry has doubled down on ad-supported tiers as they bring in more revenue per user, given that they generate revenue from both subscription fees and advertising dollars. Moreover, ad rates could also be favorable, given the ability to better target users and also due to Disney’s high-quality family-oriented content.  Disney’s marketing costs for its streaming business are also trending lower as the platform matures, and its bundled deals are likely helping keep churn in check. Offering Disney+, Hulu, and ESPN+ together for as little as $17 per month has made the service stickier, improving retention and lowering churn.

Notably, DIS stock has performed worse than the broader market in each of the last 3 years Returns for the stock were -15% in 2021, -44% in 2022, and 4% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could DIS face a similar situation as it did in 2021, 2022, and 2023 and underperform the S&P over the next 12 months – or will it see a recovery?

We think Disney stock is good value at current levels. The stock presently trades at about 21x consensus 2025 earnings, which is reasonable considering that earnings growth is expected to hold up. In comparison, Netflix trades at about 40x estimated 2024 earnings. Now Disney is projecting high single-digit growth in its adjusted earnings for fiscal 2025, with double-digit adjusted EPS growth in the two following years. Disney is looking to unlock more value by restructuring its business while cutting costs to bolster profitability. The company has cut over 8,000 jobs as part of its plans to reduce about $7.5 billion in costs. Disney is also targeting about $3 billion in stock repurchases in the next fiscal year and this could also help drive EPS growth going forward.

There are some challenges as well. Disney’s Experiences division, which includes theme parks, remains the company’s most important profit driver by far and has been underperforming as the pent-up demand seen post-Covid eases. Revenue over Q4 rose just 1% compared to last year, while operating income stood at $1.66 billion, down 6% from a year earlier, accounting for about 60% of Diseny’s profits. We value Disney stock at about $130 per share, which is about 10% ahead of the current market price. See our analysis of Disney’s valuation for a closer look at what’s driving our price estimate for Disney. Also, see our analysis of Disney revenue for a closer look at the company’s key revenue streams and how they have been trending. While Disney stock looks like good value, we think Netflix stock isn’t worth the risk at $840

[1] Returns as of 11/18/2024
[2] Cumulative total returns since the end of 2016

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