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Disney: Will Disney+ Be a Hit or a Dud?
Stock Analysis & Ideas

Disney: Will Disney+ Be a Hit or a Dud?

Investors have been concerned about The Walt Disney Company (NYSE:DIS)’s growth, particularly its direct-to-consumer service, Disney+. This has resulted in the stock falling 5.4% in the past month.

In contrast, the Dow Jones Industrial Average (DJIA) index has risen in the past month. The DJIA chart indicates that the Dow Jones index has gone up 9.8% in the past month. Disney is one of the 30 companies that make up this index.

But are investor concerns about Disney+ justified? Let us take a look.

The performance of Disney+ in fiscal Q4 was not very encouraging, as even as its paid subscribers soared 60% year-over-year to 118.1 million, many of these paid subscribers were Disney+hotstar subscribers.

Subscribers to Disney+hotstar, a popular Indian streaming platform, made up 37% of Disney+’s paid subscriber base, Christine McCarthy, Disney’s Senior EVP, and CFO stated on its Q4 earnings call. This has left investors questioning whether Disney+ (with or without hotstar) will be able to achieve its guidance of subscribers between 230 million and 260 million by FY24.

The higher Disney+hotstar subscribers also dragged down its average monthly revenue per paid subscriber. According to Disney, the Disney+hotstar “average monthly revenue per paid subscriber is significantly lower than the average monthly revenue per paid subscriber for Disney+ in other markets.”

Disney+’s average monthly revenue per paid subscriber dropped 15% year-over-year to $4.08 in FY21.

Wells Fargo analyst Steven Cahall did a deep dive on whether Disney+ was structurally weak or whether this was just a small bump on the road for the direct-to-consumer service.

Cahall believes that excluding the launch of Disney+ in new markets, the “’organic core net adds” (that is, net adds excluding market launches and hotstar) were approximately 14 million in FY21. By his estimate, “DIS will have to average ~27mm core net adds each year from FY22-FY24 to reach its midpoint subscriber guidance.”

The analyst added that his analysis indicates that the organic core net additions slowed because new subscribers did not join in existing markets to view new content. Moreover, Cahall’s analysis suggests that core organic net additions lean heavily towards a few key markets including the U.S., U.K., and France.

Furthermore, the analyst thinks Disney’s content amortization will accelerate. Content amortization is done by media companies, wherein content is amortized over the content title’s window of availability or estimated period of use or a duration of 10 years, whichever is shorter.

Cahall drew a comparison between Disney and Netflix (NFLX) in his research report. The analyst pointed out that Netflix boasts a “near-perfect correlation” between rising content amortization and subscriber growth: every incremental $2 billion content amortization drives around 25 million net additions for Netflix.

In contrast, the analyst thinks that “Disney+ content amort was only ~$2-3bn in FY21, and guidance is for growth to $9bn+ by FY24.”

Cahall added, “That’s y/y [year-over-year] growth of ~$2.5bn p.a., which is a decent start for believing Disney+’s core organic net adds will accelerate.”

Based on a sum-of-the-part (SOTP) analysis of Disney, the analyst estimates that Disney’s direct-to-consumer services is worth $165 billion, out of which Disney+ is worth $135 billion. As a result, Cahall said that Disney+ is “now worth $150bn less than Netflix.”

But will Disney+ ramp up its content? Yes, says Cahall.

The analyst believes that Disney+ will ramp up its content “from December into CY22 and Disney+’s EV/Sub [enterprise value-to-subscriber] multiple going from ~700x today (nearly 50% discount to NFLX’s) to a more modest 20-30% discount.” He believes this move will help Disney’s content amortization to catch up to the level of Netflix.

For now, Cahall is in favor of being an “aggressive buyer,” reiterating a Buy, but reducing the price target from $203 to $196 (27.8% upside) based on its “Disney+ multiple for the added [content] risk.”

The bullishness on Disney is also indicated by Disney stock ratings, available on TipRanks. Disney scores a ‘Perfect’ 10 on the TipRanks Smart Score system, which is derived from 8 unique data sets.

Overall, other Wall Street analysts are cautiously optimistic about Disney, with a Moderate Buy consensus rating based on 17 Buys and 6 Holds. The average Disney price target of $204.05 implies 33.1% upside potential to current levels.

Disclosure: At the time of publication, Shrilekha Pethe did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates.  Read full disclaimer >

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