Disney (DIS) stock has been on a very steady decline since peaking out back in early March. Meanwhile, streaming rival Netflix (NFLX) has enjoyed considerable upside momentum, thanks in part to its smash hit in South Korean drama Squid Game, which was a record-shattering success.
With Disney+ subscriber growth poised to lose a big step, Disney needs its own version of Squid Game to reignite subscriber momentum. Pending a significant strategy shift or an unforeseen blockbuster series or film, Disney+ looks poised for a considerable growth slowdown. This has some analysts downgrading the stock after its latest slide.
Despite growth concerns surrounding Disney’s streaming platform, I remain bullish on the stock as it attempts to claw back from a 15% correction.
Disney+ is Key
Disney CEO Bob Chapek has done an extraordinary job of leveraging Disney+ to help the firm better navigate a tough 2020, and offset a portion of the profound COVID-19 headwinds the firm faced.
Indeed, Disney went from being right in the middle of the crosshairs of COVID-19 lockdowns to moving just outside of the perimeter of its sights.
With Disney+, Chapek essentially transformed a COVID-19 reopening stock into more of a lockdown play, as investors became increasingly willing to pay up a pretty penny for top-of-the-line video-streaming growth.
Chapek played the tough hand he was dealt the very best he could. The direct-to-consumer (DTC) business is a significant reason shares of DIS are not well below pre-pandemic highs like many other reopening plays (like cruise lines) that were unable to adapt and thrive in the new normal.
Despite Chapek’s successes with Disney+, investors are all about “what have you done for me lately?” In the case of Disney stock, the answer is not much.
Recently, Disney stock plunged around 3% in a day after it was slapped with a downgrade courtesy of Barclays analyst Kannan Venkateshwar over slowed Disney+ subscriber growth.
“While the company appears to be targeting one new piece of content a week, not every piece of content has the same franchise value or visibility,” said Ventkateshwar.
In simple terms, Disney has to find the right spot with a broader range of subscribers to prevent a significant growth hangover in Disney+. Disney already has younger audiences, superhero fans and Star Wars lovers subscribed. Now, it needs to take it a step further to win over the business of consumers who’ve been holding out.
The company has some of the highest quality content out there. However, in terms of quantity, Disney may need to pick up its game to keep pace with the likes of Netflix, a company that’s churning out content.
Indeed, Netflix’s smash hit Squid Game proves that you don’t need to break the bank to deliver blockbuster content. Whether Chapek takes a hint from Netflix with his strategy remains to be seen.
Regardless, Ventateshwar sees the need for change if Disney’s streaming platform is to continue growing at an impressive rate.
Wall Street’s Take
According to TipRanks’ analyst rating consensus, DIS stock comes in as a Strong Buy. Out of 19 analyst ratings, there are 15 Buy recommendations and four Hold recommendations.
The average Disney price target is $215.06. Analyst price targets range from a low of $175 per share, to a high of $263 per share.
Finding the Right Mix
Disney+ catapulted itself to 115 million subscribers on the back of COVID-19 tailwinds, and strength in its own line of high-quality exclusive content.
Still, with a limited catalogue of new titles, incremental growth at Disney+ may prove to be more challenging from here without a commitment to more content development. Fortunately, the lack of a dividend gives Disney has the financial flexibility to shift some gears to keep the growth alive at Disney+.
It’s not easy to deliver on both quality and quantity, especially without further acquisitions. If Chapek can deliver, though, the upside in Disney stock could be enormous.
Disclosure: Joey Frenette owned shares of Netflix at the time of publication.
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