There is a lot of negative sentiment surrounding Disney (DIS) going into earnings. The main reasons are theme parks and ESPN. Theme parks will be one of the most affected sectors, because of the country lockdowns and social distancing rules. With no live sports ESPN is not a bright spot as well. Nonetheless, the stock has lost 30% since the start of the year. We think the negative expectation regarding the theme parks and ESPN is backed into the current price. We like it on a longer-term horizon at these levels.
The main reason we see the potential for a good upside is Disney Plus and Hulu. In our view, the current situation with people in lockdown represents a once in a lifetime opportunity for Disney Plus and Hulu. On 8. April Disney Plus had 50 million subscribers and just started their international rollout outside of the US. To put that in perspective. Disney rolled out the service in November 2019. Management expected to get between 60 million and 90 million subscribers by the end of fiscal 2024. It seems now they are going to get them by the end of 2020. Together with Hulu (who is only in the US), they have 80 million subscribers. That is already almost half of the subscriber base of Netflix. We also expect good retention rates from Disney Plus because of a younger audience (especially with children) and a lower, more compelling price point than Netflix. We also like the fact that not many parents can cancel their children’s $7 subscription to their favorite show or cartoon.
From a valuation standpoint at current valuations, Netflix and Disney are similar in market cap. Netflix is at 185 billion and Disney at 195 billion. Disney’s reported revenue in Q4 from Disney Plus and Hulu was the same as Netflix’s numbers in 2018. So on top of assets like theme parks, movies, and ESPN, you get a “2018 Netflix”.
Looking 6-12 months ahead, we see a stabilization of revenue and sales of Theme parks and ESPN, primarily because of people “starving” for experiences. On the streaming side, we think Disney’s main advantage compared to others is their content generation with their original movies and shows (many of them rolling out in 2020). In the Streaming world, on the long term content will prevail all other.
From a valuation standpoint, Disney’s Price to Earnings and Price to Book ratio is on the low side of their 10-year average, which despite the short term headwinds the stock faces from the COVID19 situation, makes a compelling entry point.
Disney is set to report earnings on 5 of May 2020.
Disclosure: The author of this post is long DIS. I wrote this article myself, and it expresses my opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This is not financial advice. Please read the Disclaimer.
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