Can Streaming Gains Drive Disney Stock 2x?

Disney (NYSE:DIS) Q4 results show that its streaming business is finally hitting its stride. While the company’s theme parks and cable TV faced pressure, the streaming business performed well. 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 during the same period last year. That said, Netflix (NASDAQ:NFLX) still wears the streaming crown. Its stock is up nearly 90% this year, well ahead of Disney stock’s 29% gain, and its market cap stands at a massive $390 billion, almost double Disney’s $200 billion. But here’s the interesting part. Disney’s direct-to-consumer operations aren’t actually very far behind Netflix in scale. Disney brought in close to $23 billion last fiscal year compared to Netflix’s estimated $39 billion in streaming revenue for the current fiscal year.  This gives us reason to think that Disney’s overall valuation may be underappreciated given its streaming strengths. As an aside, what’s happening with the controversial AI Stock Super Micro Computer?

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?

Disney’s Streaming Business Is Executing Well

Disney has devoted considerable resources to its streaming operations in the last few years, and it’s finally starting to pay off. Disney+ added 4.4 million core subscribers last quarter, excluding the lower-priced Disney+ Hotstar service in India.  Disney had about 123 million subscribers on its core Disney+ services, up 9% compared to the last year, while the Hulu service had about 52 million subscribers, up about 7% compared to last year. Besides subscriber growth, Disney’s strategy of raising prices has also been a key driver of revenue growth. 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 for Disney, given the ability to better target users and also due to Disney’s high-quality family-oriented content.

Disney Vs. Netflix

Netflix reported that it had 283 million subscribers globally as of the most recent quarter, a 14% year-over-year increase led by its crackdown on account sharing and its advertising push. In comparison, Disney has a total of about 175 million subscribers across Hulu, and the core Disney+ offerings, growing at a slower 8% compared to last year. Netflix’s average revenue per user (ARPU) is also more attractive, standing at $11.60 globally, compared to $7.30 for Disney+ although Disney’s Hulu service has higher average monthly revenues of about $12.50.

That being said, Disney’s streaming operations are hardly anywhere near as profitable as Netflix. Operating margins for the direct-to-consumer business stood at just 5% in the most recent quarter for Disney, versus a solid 30% for Netflix. This difference in profitability and scale is reflected in the valuations of the two companies. Netflix trades at approximately 39x estimated 2025 earnings, while Disney, including its other media and theme park assets, is valued at a more modest 21x. While Disney stock looks like good value, we think Netflix stock is not worth the risk at $900

Streaming Re-rating Could Drive Disney Stock 2x

While Netflix has seen stronger momentum versus Disney, we believe that Disney holds immense potential thanks to its vast intellectual property library, which includes iconic franchises such as Marvel, and Star Wars, besides Pixar and its legacy animation assets.  To close the valuation gap, Disney must continue to boost its streaming margins while improving its subscriber additions. We believe this is possible.

How so? On the subscriber and revenue growth front, Disney has been pushing the paid sharing feature. The option was introduced in the United States in September, allowing members to add a user outside their household for an additional fee starting at $7 per month. In comparison, Netflix launched this option in the U.S. in May 2023 to great results. We could see similar improvements for Disney as well.

On the margins front, 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. We also believe that the investments Disney makes toward its streaming business will have a long lifetime value. Why so? Unlike Netflix, which monetizes its content investment solely via monthly subscription fees, Disney has a much larger value chain, given its theatrical business, theme parks, merchandise, and licensing operations. Disney’s content investments are likely to be much more durable, given its iconic franchises, unlike Netflix which focuses a lot on one-off shows.

While it might take a while for Disney to match Netflix’s efficiency and execution, the recent progress has been encouraging. Disney’s streaming revenues grew by about 14% year-over-year to $22.7 billion in FY’24. If sales expand at about 12% each over the next two years, it could translate into revenues of about $28.59 billion by FY’26. If Disney can boost its operating margins for streaming to about 25% (compared to about 30% for Netflix), it would translate into operating earnings of about $7.1 billion. Now Netflix trades at about 39x its estimated 2024 operating income. If investors value Disney’s streaming operations at about 30x operating earnings, about 25% below what they currently value Netflix’s business, this would translate into an enterprise value for Disney’s streaming business of close to $210 billion. That’s nearly Disney’s entire current market cap.  However, there’s a lot more to Disney’s business which includes theme parks, TV, and sports entertainment, which brought in a combined $67 billion in revenue over the last fiscal year. If we were to add these to the mix it’s not hard to imagine Disney stock doubling from current levels.  See our analysis of Disney’s valuation for a closer look at what’s driving our current 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.

[1] Returns as of 11/25/2024
[2] Cumulative total returns since the end of 2016

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