Few companies have suffered from the double-barreled shotgun blast of the COVID-19 pandemic quite like theme-park operator and entertainment content provider Disney (DIS). On the cusp of incurring a rags-to-riches style narrative twice in the new normal, the proceedings have been exhausting for stakeholders. Nevertheless, Disney has rewarded their patience with exceptional performance for its streaming unit, Disney+. Therefore, I am bullish on DIS stock.
While the Magic Kingdom offers plenty of thrills and spills across its vast portfolio of theme parks and resorts, investors of DIS stock largely prefer a more sedate experience. However, owning an equity stake in Disney has been anything but serene during the two-year-plus journey of the new normal. Indeed, the company has been to perdition and back – twice.
First, after Disney posted record revenue for its Fiscal Year ended September 30, 2019, the company soon fell victim to the SARS-CoV-2 virus. When the dust settled in Fiscal Year 2020, the entertainment stalwart posted top-line sales of $65.4 billion, a loss of 6% against 2019’s result.
However, most of the attention focused on the staggering net loss of $2.86 billion. In the prior two years, net income averaged $11.8 billion. Unfortunately, Disney incurred a staggering loss of operating income because it was simply unable to open its doors to guests.
Second, after DIS stock recovered sharply in late 2020 – stemming from anticipation that the COVID-19 vaccine would spark a return to normal – it continued to make steady gains until around September 2021. A combination of disappointing financial performances combined with rising inflation crimping household spending power took the air out of the Magic Kingdom.
Still, the narrative appears to be transitioning favorably once again, this time because of the Disney+ streaming unit.
Also, DIS has an 8 out of 10 on the Smart Score rating on TipRanks. This indicates strong potential for the stock to outperform the broader market.
Blistering Results Bolster DIS Stock
Not too long ago, the TipRanks Team labeled DIS stock as an opportunity to place a down payment on the House of Mouse. It’s hard to top such a resounding and succinct call to action like that.
Per TipRanks, in Disney’s latest Fiscal Q3-2022 results, it reported that “both sales and (pro forma) profits topped analyst expectations, coming in at $1.09 per share and $21.5 billion respectively. Disney+ subscribers grew 31% year-over-year to 152.1 million, and ESPN+ subscribers grew even faster — up 53% to 22.8 million.”
Moreover, even “Hulu grew its subscriber count for Disney, albeit at a more leisurely 8% rate — 46.2 million subscribers. And going forward, Disney projected that its subscriber growth will actually accelerate in the year’s final fiscal quarter.”
All in all, across its streaming brands, “Disney now boasts a total of 220 million subscriptions and more than $20 billion in annual revenue from streaming.” By doing so, it snuck past streaming king Netflix (NFLX).
Full credit goes to TipRanks contributor Joey Frenette, who headlined (back on July 25) that Disney+ could top Netflix in the so-called streaming wars. The Magic Kingdom did exactly that, lending more credibility to Frenette’s bullish thesis.
In particular, the analyst mentioned Disney’s possible recession-resistant profile. By increasingly offering R-rated titles to appeal to its adult consumer base, Disney+ could become even more holistically relevant. In doing so, the company would essentially encroach upon Netflix’s core offerings of gritty, compelling programs.
Disney Takes on the Big Screen
While the streaming wars may provide most of the drama, it’s important not to forget that Disney also has eyes for the big screen. While the competition remains tight in the home entertainment sector, a good chance exists that the House of Mouse will run away with the box office. Therefore, DIS stock deserves extra attention.
To be fair, many analysts and entertainment industry experts warned that the cineplex operator business may no longer align with contemporary consumer interests. Even before the COVID-19 crisis, people could just spend a few bucks a month and stream video on demand. That kind of convenience and low pricing simply doesn’t exist in the modern box office.
However, investors may be looking at this narrative incorrectly. As the resounding success of Top Gun: Maverick demonstrated, it’s not so much that watching movies on the big screen is antiquated. Rather, consumers are much more discerning about which type of movies to see in public.
As I mentioned earlier this month, “Back in 2000, the top 10 grossing films at the domestic box office featured a wide range of genres. From action movies to comedies to even a biopic of American activist Erin Brockovich, the consumer ecosystem at the time facilitated content diversity. Since people were willing to pay for art, Hollywood studios gave moviegoers exactly what they wanted.”
“Fast forward to 2019, and the situation changed dramatically. Here, the top 10 grossing films mostly featured science fiction or comic-book-related films. Stated differently, if Hollywood wants to compete in the modern entertainment arena, it must pump out costly summer blockbusters.”
For some companies, pumping out summer blockbusters is too onerous (and risky) of a proposition. However, with Disney acquiring major franchises like Marvel Comics and Star Wars, it has every incentive to milk these pop culture phenomena for all they’re worth.
What is the Price Target for DIS Stock?
Turning to Wall Street, DIS stock has a Strong Buy consensus rating based on 17 Buys, three Holds, and no Sell ratings. The average DIS price prediction is $139.58, implying 14% upside potential.
Conclusion: Disney is Probably Too Big to Fail
Content purists may not appreciate what Disney has done to the art form of filmmaking. Nevertheless, the reality is that the entertainment sector has changed. If a company wants to survive – let alone thrive – it must have access to the most compelling brands and franchises. That’s DIS stock, in a nutshell, making it a potentially-solid Buy, if only because it’s probably too big to fail.