For a stretch of four years between early 2015 and early 2019, shares of Disney (NYSE:DIS) were stuck in neutral in the $90 to $110 range as the media giant struggled with cord-cutting headwinds. Put simply, consumers were abandoning traditional entertainment models and pivoting to the direct-streaming channel. Disney didn’t have a solution for that exodus of cable subs. DIS profits struggled to move higher. So did the Disney stock price.
But in April 2019, Disney finally delivered on a solution that could solve the company’s persistent cord-cutting issues: its very own subscription-streaming platform, Disney+. Investors rallied behind the Disney+ idea, and DIS stock broke out of its four-year sideways trading range.
By mid-April, the Disney stock price had shot above $130. Today, shares are closing in on $140. The implication? Investors are expecting a lot out of Disney+.
They should. The streaming service projects as a huge success for this company. Ultimately, it will change the whole narrative surrounding Disney stock. It will add billions of dollars to the top and bottom lines and help mitigate cord-cutting headwinds.
Stated bluntly, you should buy DIS stock because Disney+ will return shares back to their winning ways.
Understanding the Streaming Market
First, to appreciate why Disney+ will be a huge success, we must understand the global streaming market’s addressable opportunity.
In a nutshell, the pivot from linear TV to internet TV is happening everywhere. It started in America, where streaming penetration rates are very high. It has since spread to the rest of the world, where streaming penetration rates are relatively low but scaling rapidly. This trend should continue because internet TV offers unmatched price and convenience advantages over its traditional counterpart.
Right now, there are about 68 million streaming households in the U.S. That equates to roughly 60% penetration among domestic internet households. That penetration rate is up from 50% in 2017. By 2025, it will probably hit 80%. Assuming so, that would equate to about 100 million streaming households.
Globally, there are roughly 300 million streaming households. That equates to approximately a 25% internet-household penetration rate. That’s up from 20% in 2017. Much like the U.S. streaming-penetration rate, the global streaming penetration will rise too. By 2025, it could realistically hit 35%. Assuming global internet penetration rates rise too, then that would equate to around 600 million global streaming households. This would break down into 100 million U.S. streaming households and 500 million international households.
At a price of $7 per month — the price for Disney+ — that equates to a potential addressable revenue opportunity of over $50 billion. That’s a big number, and it’s why investors are so excited about Disney+’s potential.
Disney+ Could Have 150 Million Subs by 2025
At the present moment, Netflix (NASDAQ:NFLX) is the king of the streaming market globally. Domestically, about 85% of all streaming households subscribe to Netflix. Internationally, Netflix’s penetration rate among streaming households is around 35%.
Disney won’t ever get to those penetration rates. Netflix was the first mover. Its adoption was synonymous with the broader transition to the streaming platform. Netflix has also done an excellent job of leveraging its size and data to produce quality original content.
Having said that, Disney+ could one day become a very solid number two in the global streaming market. Disney has the most-watched portfolio of content in the world, which generates billions of dollars in box-office revenue annually. The company also attracts multiple interests and demographics.
Because of this, Disney+ should have no problem gaining subs. How many? Management is targeting between 60 million and 90 million globally in the next five years. That tally includes around 20 to 30 million U.S. subs.
Those numbers are conservative. Realistically, Disney+ will probably hit around 50% penetration among domestic streaming households by 2025, implying around 50 million subs. Internationally, the penetration rate could easily hit 20%, implying around 100 million subs. Add that up and you get 150 million subs, which is about what Netflix has today.
At $7 per month, that translates into $12.6 billion in annual revenue. Disney’s sales estimate for this year stands at $70 billion. Thus, Disney+ will provide a near 20% boost to revenue over the next several years, and presumably an even larger boost to earnings per share because the service should be high margin at scale.
Bottom Line on Disney Stock
Disney stock has spent the past four years going nowhere because of cord-cutting headwinds and limited streaming exposure. But by the end of 2019, Disney will have robust streaming exposure thanks to Disney+, ESPN+, Hulu, and Hotstar. At the same time, cord-cutting headwinds should moderate as the growth narrative pivots to streaming.
Thus, while Disney stock has spent the past four years going nowhere, it could spend the next four years making up for that sluggish performance since 2015.
Here’s what you need to know: the long overdue streaming pivot for Disney is finally here. As this new streaming narrative gains traction over the next several years, DIS stock will turn into a consistent out-performer.
As of this writing, Luke Lango was long DIS stock and NFLX stock.
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