Media and entertainment platform Walt Disney (NYSE: DIS) is showing strong signs of gaining back its lost glory.
What Looks Good
Even after being beaten down by macroeconomic headwinds this year, the growing popularity of Disney+, as evident from the consistently increasing subscriber base, has been helping the company weather the storms. A strong and affordable content portfolio is one of its biggest cash cows.
Coming to its business segments, not too long ago, market experts were concerned about the closure of the theme park in Shanghai. However, Needham analyst Laura Martin is certain that the Parks segment holds the key to significant improvement in the overall operating income of the company.
Higher capacity and per-capita spending at the U.S. Disney theme parks are expected to bring in higher revenues and operating income. Internationally, Martin looks for a stronger-than-expected performance for the parks in Paris and Tokyo, even though international results will still be slightly subdued due to the closure of the Shanghai park.
The analyst is also bullish on the cruise division of the Parks segment, which resumed business earlier this year following a period of sporadic suspensions due to the pandemic.
Moreover, Martin’s optimism about Disney’s longer-term prospects is very encouraging. “Longer term, we believe DIS will be a winner in the streaming wars owing to its: a) superior marketing skills; b) lower SAC; c) strong IP franchises; d) A+ library titles; and e) world-class storytellers at Pixar, Lucas Films and Marvel,” opined the analyst.
Also encouraging is the fact that Disney’s shareholders will get to enjoy the direct benefits of the company’s original content. This is because, unlike Netflix (NFLX), which pays a huge sum as rent to produce its content, Disney owns its studios and saves on this rent.
Moreover, Disney boasts of vast and high-quality content libraries of popular film and TV franchises. This is an aspect Martin thinks places the company in a strong position to drive the crowd to the metaverse and make it successful.
“We believe that high-quality content libraries with hit film and TV franchises will be revalued upward as the metaverse scales and becomes more widely adopted over time. No one has better fan-driven IP than DIS (our view),” noted Martin.
Points to Ponder
However, Martin also pointed out some pain points in the business in order to make investors aware of the whole situation from a neutral point of view.
For instance, in the third quarter of Fiscal 2022, Martin raised her view on direct-to-customer (DTC) programming costs at both Disney+ and Hulu. Moreover, higher sports costs are also expected to dent margins.
Additionally, Disney is set to introduce new international markets to expand its reach. This means that there will be a ramping up of marketing costs during the FQ3, resulting in a higher-than-expected operating loss in the DTC segment.
Even though Disney’s strong balance sheet will help it sustain through longer COVID-led earnings headwinds, Martin prefers to maintain a neutral stance until Disney’s streaming spending cools off a little. “We prefer to remain on the sidelines until we reach peak streaming spending and begin a long ramp of improving ROICs (returns on invested capital) from DIS’s streaming investments,” said Martin.
With these arguments, Martin maintained a Hold rating on the DIS stock.
Wall Street’s Take
Wall Street analysts are cautiously optimistic about Disney, with a Moderate Buy consensus rating based on 17 Buys and seven Holds. The average Disney price target is $147.35, implying 36.1% upside potential.
Parting Thought
While Disney does have several near-term headwinds, the longer term looks healthy for Disney as long as it can get through those short-term headwinds.
