Investors in Walt Disney (NYSE:DIS) have to be smiling these days. Shares of Disney stock have surged nearly 30% year-to-date and are up more than 70% over the last five years.
That return has allowed Disney to beat the broader market and nearly all its peers in the media/entertainment sector. From rising park attendance to plenty of blockbuster hits, all is sunshine for the House of Mouse these days.
But apparently, all is too well for DIS.
Disney recently received a very rare analyst downgrade. This is only the second time in more than a year that someone thought that it wasn’t worth buying. While some of the analyst concerns do make sense, the reality is, Disney has plenty of growth still left in the tank and shares could run even further in near-to-medium turn.
The Disney Stock Downgrade
Disney normally doesn’t get hit with much negative attention. Sure, there were issues with ESPN and cord cutting a few years ago, but the firm continues to plow ahead with a variety of revenue-generating ideas that seem to be working. As a result, investors tend to think of Disney in a positive fashion.
DIS stock currently features 14 “buy” ratings and only four “hold” ratings. So, when Imperial Capital downgraded DIS stock to essentially a “hold” rating, many market participants were perplexed and caused the stock to sink more than 1% on the day.
The reason for Imperial’s downgrade of DIS comes down to future growth expectations.
According to analyst David Miller, Disney stock is now trading at record levels relative to projected 2021 per-share earnings. Miller’s report highlights that DIS never trades at more than an 18x forward P/E.
However, according to his model for earnings, the House of Mouse now trades at a 21.7 forward P/E for 2020 and 19.3 forward P/E for 2021. As a result, Imperial sees limited potential for gains in DIS stock and is already so close its $147 per share price target.
Growth and Disney Stock
Imperial’s concerns do seem valid on the surface. Disney has surged big on many its recent wins and investors may already be pricing in a lot of growth. But they also could be pricing in not enough growth as well. That growth comes from three main points.
For one thing, Disney+ is going to be a sheer monster for the company. It’s no secret that the streaming wars are heating up and DIS is truly going to rule the roost. While hits like the Game of Thrones tend to make the news, the reality is that kids movies and T.V. shows tend to make up the most streaming viewership, and no one does kid’s entertainment like Disney.
The announcement for its streaming service will feature its animated classics, the complete Lucasfilm, Marvel and Pixar movie libraries as plenty of its original programming content from the Disney Channel. Moreover, Disney+ will feature plenty of new original kids and tween shows.
As Disney starts to pull its shows and movies off of other services, parents everywhere will start pulling their hair and give into Disney+. Analysts at Morgan Stanley now predict that DIS will see more than 133.3 million paid subscriber services by fiscal 2024. That gives it a faster growth rate than Netflix (NASDAQ:NFLX).
However, we could see faster growth rates than that and hit those big numbers earlier. That’s because Disney’s is planning on offering bundles of Disney+, ESPN+ and Hulu services for about $2 less per month than NFLX. This should help pull customers from the rival service- especially when you get your kid access to Hanna Montana and Star Wars.
Speaking of Star Wars, DIS is effectively milking that franchise for all its worth. This includes its immersive Galaxy Edge land in Disneyland. Already, the world is a big hit and consumers continue to fork over some big cash to buy custom lightsabers, their own droids and drink plenty of high-end cocktails. In essence, the real people DIS is courting are adults. And it’s working so well, there’s no reason why they can’t replicate the land in its other parks.
Finally, Disney has a massive slate of movies hitting screens in the near to medium-term. Top franchises from Marvel, live-action adoptions of former animated hits and several new films from its now owned Fox studios could bear plenty of blockbuster fruit. And if you want to see these films outside the theater, you’ll have to subscribe to Disney+.
Disney Stock Could Hit $200
In the end, Disney still has a lot of growth potential in its hands. A lot has been priced in for Disney+, but here the firm has plenty of levers to pull in order to grow subscriber growth faster than expected. Bundling will work to pull over more viewers from rivals. Meanwhile, park attendance and higher-end experiences are courting more adults to spend big time. Adding its film potential and you have a recipe for success.
When you finally add in Disney’s lucrative buyback programs you start to see a much brighter picture for DIS stock over the long haul. With that, there’s no reason why Disney stock couldn’t hit $160 or even $200 a share over the next couple of years.
In the end, the House of Mouse continues to win and win big. That’ll drive multiple expansion over the long haul.
Disclosure: At the time of writing, Aaron Levitt did not hold a position in any stock mentioned.
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