When it comes to media giant Disney (NYSE:DIS), the 2010s can be split into three parts: the first half, the second half, and overtime. And it looks as if Disney stock has a really interesting overtime ahead.
Source: Baron Valium via Flickr
The first half, which ran from early 2010 to early 2015, was defined by steady revenue growth, strong margin expansion, big profit growth, and huge share price gains. During that stretch, DIS stock went from $30 to $90.
The second half, which ran from early 2015 to early 2019, was defined by steady revenue growth, margin pressures, sluggish profit growth, and a muted stock. During that stretch, DIS stock traded sideways around the $100 range.
Now, we are in the overtime phase, which began in early 2019 when Disney announced details surrounding its Disney+ streaming service. We aren’t that far into this stretch, but the thesis is simple. Over the next several years, Disney’s big streaming pivot will unlock tremendous value, and drive revenue and profits materially higher.
As revenues and profits move materially higher, so will DIS stock. In anticipation of all this growth, Disney stock has risen nearly 30% year-to-date to all-time highs.
In this article, we will take an in-depth look at why recent strength in Disney stock, will extend into the first half of the 2020s. Indeed, during the first half of the 2020s, the fundamentals here support Disney stock nearly doubling from current levels.
Without further ado, let’s breakdown the long term bull thesis on Disney stock segment by segment and take a look at why DIS stock is worth buying for a huge upside into 2025.
Media Networks Business Declines Will Moderate
One of the more important components of the bull thesis is the idea that secular declines in the Media Networks business have already started moderating and will continue moderate for the foreseeable future. This moderation will continue to occur as higher advertising rates offset slight subscriber declines and as the cable world pivots into the over-the-top channel.
We all know that cord cutting is the trend these days. Consumers are increasingly pivoting their consumption from linear to internet TV, and in the process, cutting the cord. Roughly 10% of Americans have already cut the cord. By 2022, that figure will stand close to 20%.
Still, at 20%, that means four out every five Americans will still be paying for cable, more than a decade after Netflix (NASDAQ:NFLX) first launched into the streaming world. That’s a pretty big portion. Why so big? Because consumers still love pay TV content. They love their local news channels, The Bachelor, re-runs of Law & Order, NBA and NFL games, so on and so forth.
As such, because consumers still actually love pay TV content, the pay TV world isn’t doomed for the apocalypse as many think. Instead, pay TV content packages will similarly pivot from linear to internet TV through things like YouTube TV, meaning that big cable companies like Disney will actually win back some of the cord cutters they’ve lost over the past several years.
As this dynamic plays out, Disney’s Media Networks business will start to stabilize. Margins will remain under pressure because margins in the over-the-top world are notoriously lower than margins in the pay TV world. But, revenue and subscriber stabilization will help offset that margin compression.
Last year, the Media Networks business did about $24.5 billion in revenue on 27% operating margins. Last quarter, revenues in this segment rose 3%, while margins dropped. This dynamic will persist. This business projects as a ~3% revenue grower for the foreseeable future, with margins that could drop to 20% by 2025.
Net-net, that puts revenues around $30 billion by 2025 and operating profits around $6 billion.
The Parks Business Will Continue to Fire on All Cylinders
Another important component of the long term bull thesis on DIS stock is that through all the cord-cutting background noise the company’s Parks business has been firing on all cylinders. Theme parks will continue to fire on all cylinders for the foreseeable future given Disney’s enormously strong global brand equity and a shift in the consumer economy towards spending more on experiences.
Disney’s Parks business has been a symbol of strong and steady growth for the past decade. Since 2010, cumulative Parks attendance has risen more than 30%, per capita spending has risen more than 40%, and total revenues have risen more than 80%. That broadly breaks down into mid-single digit attendance and per capita spend growth every year, and a compounded annual revenue growth rate in the high single-digit range.
On top of all that, operating margins in the Parks business have expanded from 12% in 2010, to 22% in 2018, driven mostly by the higher per capita spend. High single-digit annualized revenue growth plus 10 points of cumulative margin expansion has driven mid-teens annualized operating profit growth since 2010.
This healthy revenue growth on top of steady margin expansion dynamic will persist. Disney’s global brand equity is second to none, and the parks business is simply a physical extension of the movie business. So long as the company keeps pumping out movies that everyone and their best friend around the world watches, their Parks will remain in high demand.
Further assisting Parks demand, consumers are increasingly shifting towards spending more on experiences versus products, and Disney Parks certainly are experiences.
All in all, then, Disney’s Parks business projects to remain on fire for the foreseeable future. High single-digit revenue growth on top of steady margin expansion will remain the norm here. By 2025, I think this could be a $35 billion business with somewhere between 26% and 30% operating margins, implying roughly $10 billion in operating profits.
The Studio Business Will Stay in Growth Mode
One could very reasonably argue that the core of Disney is the content. After all, without content, what is Disney? The theme parks would just be regular old theme parks. The toys would just be regular old toys. There wouldn’t be a movie business, and the Media Networks business would be a shell of its current self.
As such, it is reasonable to say that the core of Disney is its content.
It is also reasonable to say that the core of Disney’s content is its Studio business. When you think of Disney content, what comes to mind first? Star Wars. Marvel. Pixar. The classic Disney films. All the blockbuster movies that seemingly every year dominate the box office. Those movies, which together comprise Disney’s Studio business, are the heart of Disney’s content and overall business.
Consequently, without strength from that Studio business, the rest of the bull thesis supporting Disney stock falls apart. Fortunately, that Studio business projects to stay in growth mode for the foreseeable future.
Disney has just scratched the surface of the content potential in the Marvel universe, as that universe spans thousands of characters and hundreds of story-lines. The Star Wars universe is equally large and lends itself to just as many potential movies. Pixar is largely unrivaled in the animation world, and those movies have secular demand. The classic Disney content portfolio is huge and lends itself to a plethora of re-make opportunities.
All in all, then, Disney’s Studio business will continue to dominate the global box office for the foreseeable future. Over the past decade, that dominance has amounted to mid single-digit revenue growth on top of margin expansion. That growth profile will persist over the next several years, too. As such, by 2025, this could easily be a $14 billion business, with 35% operating margins and nearly $5 billion in operating profits.
Consumer Products Will Rebound
One of the smaller businesses over at Disney that often hides in the shadow of the Parks, Studio, and Media businesses, is Disney’s Consumer Products business.
This business is a fairly straight forward one. Disney produces a bunch of movies. From all those movies, Disney makes and sells a ton of accompanying merchandise, like toys, video games, clothing, so on and so forth. The revenue generated from all that merchandise is tallied up and recorded under Disney’s Consumer Products business.
The Consumer Products business has struggled over the past several years. There has been a secular decline in toy demand as children have started playing on smart devices and tablets as opposed to playing with traditional toys. Just look at the stock of toy-maker Mattel (NASDAQ:MAT) over the past five years to see proof of this. As traditional toy demand has dropped, so have revenues and margins in Disney’s Consumer Products business.
But, this decline is a near-term phenomenon. Eventually, Disney will pivot its Consumer Products focus from traditional toys to interactive media, and growth will return to this segment when they do. After all, despite recent declines, the Consumer Products business has still grown revenues a 4% annualized pace since 2010.
Going forward, this business should return to mild growth. Margins should improve, too, as the company pivots into higher-margin and higher-value interactive media products. Net-net, by 2025, I reasonably think the Consumer Products business will measure around $6 billion in revenues with 40% operating margins, implying operating profits of about $2.4 billion.
Streaming Upside Potential Is Huge
The biggest component of the long term bull thesis on DIS stock is this company’s huge pivot into the streaming market, as this pivot has the potential to unlock tremendous value for the company in the long run. At the core of this streaming pivot is Disney’s very own Disney-branded streaming service, Disney+.
As discussed earlier, consumers everywhere are rapidly shifting from linear TV content consumption to internet TV content consumption because the internet TV channel offers lower prices and higher convenience. This shift is still in its early stages, and over the next several years, will continue with great momentum. At scale, the opportunity in the internet TV market will be huge.
Right now, there are about 68 million streaming households in the U.S, that equates to roughly 60% penetration among domestic internet households. Globally, there are roughly 300 million streaming households, which is roughly 25% of all internet households. Over time, domestic and global streaming penetration rates will rise, and the domestic and global streaming household markets will grow substantially.
By 2025, the U.S. streaming household penetration rate could measure about 80%, which would equate to 100 million households. The global streaming household penetration rate could measure 35%, or about 600 million households (500 million households outside of the U.S.)
That is 600 million households around the world which will be paying some amount per month for at least one streaming service. Let’s say Disney signs up all 600 million of those households for Disney+. At a price point of $7 per month, that would add up to an annual revenue opportunity of over $50 billion.
Disney+ Will Power Huge Streaming Growth
To be sure, there is close to 0% chance that Disney signs up 600 million households for Disney+ by 2025. That’s simply too much growth in not enough time. Netflix today only has about 150 million subs.
But given that about 85% of all streaming households in the U.S. subscribe to Netflix, 35% of international streaming households subscribe to Netflix, and that Disney’s content portfolio is on par with Netflix’s content portfolio, it is fairly likely that by 2025, Disney+ does hit Netflix-like penetration rates and becomes fairly large.
To be conservative, let’s call it a 50% domestic penetration rate, and a 20% international penetration rate. That would sum up to roughly 50 million domestic subs, 100 million international subs, and 150 million total subs.
At $7 per month, that translates into a $12.6 billion annual revenue opportunity for Disney+. Assuming the other streaming services like ESPN+ amount to a few billion dollars in revenue by then, Disney’s streaming segment could easily measure around $15 billion in revenues by 2025.
The streaming segment won’t be terribly profitable by 2025. But, it could be as profitable as Netflix is today. Netflix runs at roughly 10% operating margins. Thus, Disney’s streaming business could realistically measure $15 billion in revenues by 2025, with a 10% operating margin and $1.5 billion in operating profits.
The Growth Trajectory Will Accelerate Higher
If we add up all the aforementioned projections for Disney’s various businesses, it becomes very obvious that Disney’s profit growth trajectory is set to accelerate higher over the next several years. This profit growth trajectory acceleration ultimately lays the groundwork for Disney stock to head higher in the long run.
Since 2014, Disney’s profit growth trajectory has fallen relatively flat. During that stretch, revenues have risen at a fairly healthy 5% compounded annual growth rate, relatively consistent with the 6% compounded annual revenue growth rate reported between 2010 and 2014.
From 2014 to 2018, however, margins have been under tremendous pressure, and haven’t made any upward progress. As such, 5% compounded annual revenue growth, has turned into 5% compounded annual operating profit growth. That compares unfavorably to 10%-plus compounded annual operating profit growth from 2010 to 2014.
Of note, from 2010 to 2014 when profit growth was running at a 10%-plus pace, Disney stock tripled from $30 to $90. During the 2015 to 2018 era when profit growth fell into the ~5% range, the stock was largely stuck in neutral around $100.
Fortunately, given the above projections, it appears that profit growth will once again re-accelerate higher. By 2025, Disney will likely be a $100 billion revenue company with $25 billion in operating profits (simply add up all the projections from above). In 2018, revenues stood at $59.4 billion, while operating profits came in at $15.7 billion. Thus, over the next seven years, Disney projects as an 8% revenue grower and 7% operating profit grower.
That compares favorably to and represents acceleration from the 5% revenue and profit growth trajectory the company has been on since 2014. Broadly, that means that growth at Disney will pick up momentum over the next several years, and as it does, Disney stock should respond favorably.
Investors Will Take a More Favorable View on Disney Stock
To be sure, while 7% operating profit growth from 2018 to 2025 is better than 5% operating profit growth from 2010 to 2014, it is still substantially worse than the 10%-plus operating profit growth that was reported between 2010 and 2014. But, 7% operating profit growth over the next several years should be enough for investors to take a more favorable view on DIS stock, and push this stock higher.
From 2010 to 2014, DIS stock’s trailing price-to-earnings multiple hovered between 16 and 20, so roughly 18 at the midpoint. That 18-times trailing multiple on top of 10%-plus operating profit growth drove DIS stock to triple in nearly four years. That’s a huge gain.
Now, Disney’s go-forward growth trajectory is slower (7% operating profit growth). But, the valuation is also lower (15-times trailing earnings), meaning that as profit growth re-accelerates higher over the next several years, there is room for multiple expansion here.
Indeed, that is exactly what will happen. Over the next several years, as streaming service expansion pushes Disney’s profit growth rates higher, investors will increasingly see Disney as an innovative streaming company, not an antiquated media company. This optics shift will boost investor sentiment and essentially cause a re-rating in the stock back to growth territory.
Growth stocks normally trade around 20-times forward earnings. Thus, at 15-times forward earnings today, DIS stock has a lot of room for potential multiple expansion over the next several years. That multiple expansion on top of mid to high single profit growth should drive healthy gains in Disney stock.
Disney Stock Could Rally to $260 in the Long Run
As mentioned earlier, Disney’s operating profits could stand around $25 billion by 2025, and that volume of operating profit easily warrants a $260 price target for DIS stock by 2024.
The math here is pretty easy to follow. Take that $25 billion in operating profits, and subtract out around $600 million for interest expense and other non-operating expenses. That leaves around $24.4 billion in pre-tax profits.
Take out another 20% for taxes. That leaves about $19.5 billion in net profits. Assuming the diluted share count stays around 1.5 billion, that equates to a potential 2025 earnings-per-share target of $13.
As mentioned earlier, growth stocks normally trade at 20-times forward earnings. A 20-times forward multiple on 2025 earnings-per-share of $13 implies a 2024 price target for DIS stock of $260. Thus, in the long run, Disney stock is on a winning trajectory towards a $260 price tag.
Such a big long term price target implies that there is further upside left in the near term, too. Discounted back by 10% per year (the average return for stocks per year, including dividends), that equates to a 2019 price target for Disney stock of about $160. As of this writing, the stock trades hands around $140, meaning that the long term growth fundamentals support another 15% upside over the next several months.
Bottom Line on Disney Stock
Disney stock hasn’t been the best stock to own for the past four years. But, things are changing at Disney, and after Disney+ launches in the back half of 2019, this change will start to unfold rapidly. As it does, the entire growth narrative at Disney will improve, the company’s profit growth trajectory will accelerate higher, and DIS stock will rally.
As such, while Disney stock is up big year-to-date, there’s still a lot more room for this stock to run higher over the next several months and years.
As of this writing, Luke Lango was long DIS.
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