Shares of Disney DIS touched a new 52-week intraday trading high Tuesday as part of broader market optimism. Yet, aside from possible positive U.S.-China trade war news, Disney is a stock that Wall Street is laser-focused on as the entertainment powerhouse prepares to launch its streaming TV platform in the fall.
Imperial Capital analysts on Monday downgraded Disney stock to ‘in-line’ from ‘outperform,’ citing valuation concerns. Analyst David Miller kept his $147 per share price target for DIS, which marked a roughly 4% upside to Monday’s closing price. This move came just a few days after Morgan Stanley MS analysts came out with a bullish view regarding Disney’s streaming future.
Morgan Stanley’s Benjamin Swinburne late last week raised his Disney price target to $160 from $135 and maintained a ‘buy’ rating. The bullish outlook is based, in part, on projections that Disney streaming will reach more than 130 million subscribers globally by 2024, as it challenges Netflix NFLX, Amazon Prime AMZN, and soon-to-be-competitors Apple AAPL and AT&T T. This growth is projected to come across the firm’s three core streaming platforms: ESPN+, the soon-to-be-launched Disney+, and Hulu—which Disney owns a majority of and now effectively controls after Comcast CMCSA agreed to sell its ownership stake within the next five years.
Swinburne based his bullish outlook on a quicker than projected Disney+ international roll out. With that said, the Morgan Stanley analyst projects that Disney’s streaming division will be larger in the U.S. at a projected 95 million by 2024, compared to an expected 79 million for Netflix. However, NFLX is projected to have 280 million global users within five years after it officially closed Q1 with roughly 149 million, up 25% from Q1 2018.
These two analyst notes help provide investors with a solid picture of where Disney is at the moment. Imperial Capital warned of increasingly stretched valuations. Yet it is Disney’s climbing stock price that has helped its earnings multiple look somewhat out of whack. Disney stock is now up roughly 28% in 2019 to crush the S&P 500’s 14% climb. DIS got a big boost after the company detailed some of its Disney+ streaming plans in mid-April.
Disney+ will launch in November at $6.99 a month and feature both new and old movies and TV shows from Disney, Pixar, Star Wars, Marvel, and National Geographic. It is these brands that have sparked bullish analyst outlooks and are likely to attract consumers, especially since it will cost much less than Netflix, where a premium plan runs $15.99 a month. “Stepping back and admittedly taking the long view, investing in Disney shares is a play on the durability of its IP,” Morgan Stanley’s Swinburne wrote.
“Encouragingly, consumers are voting with their wallets today, spending an estimated $15 [billion] to $20 billion a year for movies and TV product that will ultimately make its way to Disney+.”
On top of that, Disney’s $71 billion deal to buy key Fox FOXA entertainment assets helped it initially grab control over Hulu, which now boasts roughly 28 million users. The purchase will also bolster its streaming, box office, and parks future. Meanwhile, ESPN+ accumulated over 2 million subscribers in roughly a year despite not offering the sports giant’s biggest offerings. Instead, ESPN’s stand-alone streaming sports offering, which costs $4.99 per month, is focused on expansion through secondary sports such as UFC and soccer. But one day somewhat soon there will likely be a completely detached version of ESPN that features all of the core content and more.
Looking ahead, our current Zacks Consensus Estimate calls for Disney’s Q3 fiscal 2019 revenue to soar 42.3% and reach $21.68 billion. Investors should note that these figures include the likely positive impact of its Fox deal. Last quarter, revenue jumped just 3% to $14.9 billion. With that said, the company’s full-year revenue is expected to surge 20.5% to $71.61 billion. Peeking further down the road, DIS’ 2020 revenue is expected to jump 17% above our current year estimate to reach $83.94 billion.
Disney’s bottom-line outlook is less positive as it spends heavily on its streaming future. The company’s adjusted full-year 2019 earnings are expected to sink 6.4% to $6.63 per share. This projected downturn, coupled with huge gains, has caused DIS’ valuation picture to become less attractive. Disney is trading at 21.1X forward 12-months Zacks Consensus Estimates. This marks a premium compared to its industry’s 18.9X average, the S&P 500’s 16.7X, and its own five-year median of 16.6X.
Despite its somewhat stretched valuation picture, Disney’s price/sales ratio sits below its 10-year median. In the end, Disney stock is certainly one to consider in order to gain exposure to the booming streaming market. But unlike some other pure plays such as Roku ROKU or even Netflix, Disney pays a dividend and has a diversified business model.
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