Disney Stock Has Runway, but Not in the Short-Term

Thomas Niel

Disney (NYSE:DIS) stock has seen a nice run since April, with shares up more than 30%. Investors are highly bullish on the announced Disney+ streaming service. But with the company’s current valuation, is short-term upside limited?

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Disney is a content machine, and the expansion of streaming will enhance monetization of its entertainment properties. But does this mean short-term upside to the Disney stock price?

Read on to see whether the Magic Kingdom’s share price still has runway.

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Content is King, and Disney is King of Content

Disney’s decade-long acquisition spree (Marvel, Lucasfilm) capped off with the purchase of 21st Century Fox. With franchises such as The Simpsons and Avatar joining the portfolio of Star Wars, and the Marvel Universe, it is safe to say Disney is “King of Content.”

According to Box Office Mojo, Disney’s film distribution arm (Buena Vista) had a 34.9% studio market share for the first half of 2019. Combined with 20th Century Fox’s 3.9% market share, the combined Disney-21st Century Fox took home nearly 40% of theatrical box office receipts.

While theatrical is only a small portion of film entertainment revenues, these figures indicate how the popularity of the company’s content is leaps and bounds ahead of peers.

Warner Bros., which is owned by AT&T (NYSE: T) subsidiary WarnerMedia, had only a 14.4% market share. Comcast’s (NASDAQ:CMCSA) Universal had a 13.5% market share. Sony’s (NYSE:SNE) Columbia Pictures had a 9.8% market share. Paramount Pictures, a unit of Viacom (NYSE:VIA) was far behind the pack, with just 5.1% studio market share.

But is this extensive collection of entertainment franchises the company’s key to beating Netflix (NASDAQ:NFLX), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), Amazon (NASDAQ:AMZN), and Apple (NASDAQ:AAPL) in the streaming wars?

Streaming Strategy Key Catalyst for Disney Stock

After the 21st Century Fox purchase, Disney owns two-thirds of streaming service Hulu. Disney now has full operational control, and can buy out Comcast’s one-third stake as early as 2024.

Along with ESPN+, Disney already has assets in place to rival Netflix in the streaming wars. Add in Disney+, and the company could leverage their content dominance into a commanding streaming market share.

But in the short-term, the company’s streaming platforms are losing money. Both ESPN+ and Hulu generate operating losses. Disney+ will lose money for several years as well, with the company anticipating the service to only reach profitability in 2024.

Disney generates sufficient free cash flow ($2.7 billion alone in Q1 2019) to subsidize these losses, but in the short-term could see earnings take a dip. Excluding one-time items, the company’s Q1 EPS was down 13% YoY.

On the other hand, Disney may be able to use increased operating efficiencies to mitigate streaming losses. The 21st Century Fox acquisition is slated to be accretive to earnings, as the company expects $2 billion in cost synergies by 2021.

Long-term, the streaming strategy could push the Disney stock price to new highs. But at the current valuation, can investors expect additional short-term upside?


Valuation: DIS Stock Pricey, But Could See More Expansion

To a value investor, Disney stock is a hard pass. Trading at 22 times forward earnings, and at an Enterprise Value/EBITDA ratio of 19, DIS stock sells at a premium to its direct peers:

Viacom: 10 times forward earnings, EV/EBITDA of 7.7

CBS (NYSE:CBS): 8 times forward earnings, EV/EBITDA of 9.5

AT&T: 9 times forward earnings, EV/EBITDA of 7.7

Comcast: 13.4 times forward earnings, EV/EBITDA of 10

But comparing DIS stock’s valuation to its “old media” peers may be the wrong way to look at the stock. To the investing community, Disney’s killer combo of billion dollar franchises and streaming infrastructure justifies a premium valuation.

If the company continues to meet expectations, investors could bid up the Disney stock price to a valuation closer to that of Netflix and Amazon.

But are investors getting ahead of themselves? It could be five years before shareholders see a return on the streaming build-out. With several years until streaming becomes a cash cow, investors may have better opportunities to enter Disney stock down the road.

Disney Stock Price Has Runway, But Not in the Short-Term

Disney has proved itself time and time again to the investing community. Figuring out new ways to reinvent the wheel, the content juggernaut is a master at monetizing entertainment. With this impressive track record, it is highly likely the streaming strategy will be another game-changer.

But the streaming growth story is fully baked into the Disney stock price. Short-term, this could mean that shares tread water at the current price level, potentially falling off if the company’s quarterly results fail to meet expectations.

Long-term, the streaming strategy could move the needle once it reaches profitability. But in terms of short-term gains, investors should be cautious before entering a position in DIS stock.

As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.

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