Can Disney Stock Reach $250 By 2023?

Summary

• Disney+ has been a great success surpassing the 100 million subscriber mark in March 2021, and DIS has set a new target of 230-260 million Disney+ subscribers by end-FY 2024.
• DIS's stock price rose by +25% in 2020 and increased by +2% year-to-date in 2021.
• The median target price of $218 for Disney implies a reasonable one-year investment return of +18% for investors, which suggests that the company's shares are currently fairly valued.
• Disney's revenue is expected to recover to pre-COVID levels by FY 2021, but the company's earnings recovery will take a slightly longer time.
• I don't think Disney's stock price can reach $250 by 2023, as this will imply a rather rich 39.5x FY 2023 P/E multiple.
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Elevator Pitch

I assign a Neutral rating to The Walt Disney Company (NYSE:DIS).

Disney+ has been a great success surpassing the 100 million subscriber mark in March 2021, and DIS has set a new target of 230-260 million Disney+ subscribers by end-FY 2024. The stronger-than-expected subscriber growth for Disney+ was attributable to the wide appeal of Disney+ across a broader base of consumers, but the expansion of the subscriber base for Disney+ will come at the expense of larger investments.

Disney's stock price rose by +25% in 2020 and, at the time of writing, was +2% higher year-to-date in 2021. The pandemic had a mixed impact on the company, with the theme parks business badly hit by COVID-19, while Work-From-Home or WFH tailwinds have been positive for its video streaming services like Disney+.

The median target price of $218 for Disney implies a reasonable one-year investment return of +18% for investors, which suggests that the company's shares are currently fairly valued.

Disney's revenue is expected to recover to pre-COVID levels by FY 2021, but the company's earnings recovery will take a slightly longer time (exceed pre-pandemic FY 2019 earnings in FY 2023) given increased investments in content for Disney+ and the impact of negative operating leverage on the theme parks business.

I don't think Disney's stock price can reach $250 by 2023, as this will imply a rather rich 39.5x FY 2023 P/E multiple. This justifies my Neutral rating on the stock, as I like Disney as an unique, integrated media & entertainment business but I don't think its current valuations are very attractive.

Company Description And Pandemic Impact

Started in 1923 and listed on the New York Stock Exchange since 1957, The Walt Disney Company refers to itself as "a leading diversified international family entertainment and media enterprise" in the company's press releases. Americas accounted for 80% and 72% of Walt Disney's top line and operating income, respectively in FY 2020 (YE September 30), with Europe and Asia Pacific contributing the rest of the company's revenue and operating earnings.

Prior to COVID-19, Disney's Media Networks (cable networks and television stations) and Parks, Experiences & Products (themes parks and consumer products) in aggregate were responsible for more than 70% of the company's revenue and over 80% (excluding losses and eliminations) of its operating profit in FY 2019. The coronavirus pandemic had the most significant impact on DIS' Parks, Experiences & Products and Direct-to-Consumer & International (video streaming services like Disney+, ESPN+ and Hulu) businesses.

In FY 2020, Walt Disney's Parks, Experiences & Products segment saw revenue drop by -37% YoY and the business became loss-making at the operating income level due to the closure of theme parks. On the flip side, segment revenue for DIS' Direct-to-Consumer & International business jumped by +81% YoY in the most recent fiscal year benefiting from Work-From-Home or WFH tailwinds, despite a significant widening of operating losses due to increased investments. I will go into more detail about Disney+ in the next section of this article.

Revenue And Operating Profit By Segment For FY 2020 And FY 2019

Source: Disney's FY 2020 Annual Report

Disney+ Has Been A Success Thus Far

Disney+, which DIS calls "a subscription-based DTC (Direct-To-Consumer) video streaming service with Disney, Pixar, Marvel, Star Wars and National Geographic branded content" was first introduced to the market in November 2019 with approximately 10 million subscribers signing up on the first day of launch.

The number of Disney+ subscribers subsequently increased to 26.5 million as of end-2019, prior to more than tripling to 94.9 million in early-2021. At the company's 2021 Annual Meeting on March 9, 2021, Walt Disney Co. disclosed that Disney+ has passed the 100 million subscriber mark. Notably, DIS had initially set a goal of achieving 60-90 million subscribers for Disney+ by FY 2024 at the company's 2019 Investor Day. Disney eventually took less than one and a half years to surpass its initial target.

Moving forward, Disney's new target for Disney+ is to reach a subscriber base of between 230 million and 260 million by end-FY 2024, which was announced at the company's 2020 Investor Day in December 2020.

The key reason that Disney+ has exceeded earlier expectations is that the video streaming service has turned out to be much more popular with men, people in the older demographics, and people with no children, than initially anticipated. A February 2020 survey conducted by data research firm Piplsay found that "41% of men spend more time on Disney Plus, as compared to 33% of women", and that only "53% of 39 to 53-yr-olds have subscribed to Disney Plus primarily for their kids (i.e. kids were not the main factor for subscription for 47% of 39 to 53-yr-olds)." In addition, Disney revealed than over half of Disney+ subscribers do not have children. In other words, Disney+ turned out to have a wide appeal to a broader range of consumers as compared to initial expectations of Disney+ being a video streaming service mainly targeted at the family.

Based on Mordor Intelligence's December 2020 US OTT (Over The Top) Market research report, Disney+ is forecasted to have the strongest subscriber growth among the various subscription video on demand services in the US in the next five years. This is aligned with Walt Disney's goal of reaching 230-260 million subscribers for Disney+ by FY 2024. But the robust subscriber growth for Disney+ is likely to come at the expense of larger investments that depress the bottom line. Disney's operating loss for the Direct-to-Consumer & International business widened from -$1.8 billion in FY 2019 to -$2.8 billion in FY 2020 despite a +81% segment revenue growth over the same period. In December 2020, Disney had raised its estimate of content expense for Disney+ in FY 2024 from an initial $4 billion to $8-9 billion now.

Disney Stock Price

Walt Disney's stock price increased from $144.63 as of December 31, 2019 to $181.18 as of December 31, 2020, a gain of +25%. Its share price did fall to a 2020 low of $85.76 on March 23, 2020, as the company's theme parks around the world were temporarily closed in mid-March 2020 as part of efforts to contain COVID-19.

But DIS' stock price started to recover from its March 2020 trough. The company disclosed plans to re-open certain of its theme parks in late-May 2020. Furthermore, Disney+ was introduced in several European markets in late-March 2020, and the total number of subscribers for Disney+ also exceeded 50 million by early-April 2020. In FY 2020, Disney's Media Networks business was unaffected by the pandemic, as it delivered positive double-digit revenue and operating profit growth. The weakness with the company's Parks, Experiences & Products business (-37% revenue decline) was also partially offset by the strong segment revenue growth (+81%) of its Direct-to-Consumer & International business driven by the success of Disney+.

DIS' share price performance has been more subdued in 2021 year-to-date. The company's stock price increased marginally by +2% from $181.18 as of December 31, 2020 to $185.51 as of May 3, 2021. Disney's revenue decreased by -22% YoY in 1Q FY 2021, and it was only marginally profitable on a GAAP basis delivering a net profit from continuing operations of $29 million in the first quarter of the current fiscal year.

Walt Disney's Parks, Experiences & Products business continued to be a drag for the company, as the business segment generated an operating loss of -$119 million in 1Q FY 2021, and saw its segment revenue fall -53% YoY to $3.6 billion over the same period. Disney noted in its 1Q FY 2021 earnings report that "our theme parks were closed or operating at significantly reduced capacity." Although Disney+ is doing well in terms of subscriber growth, the company's Direct-to-Consumer business is still loss-making and a drag on DIS' overall bottom line. This largely explains the muted share price performance of Disney in the first four months of 2021.

Is Disney Overvalued

Walt Disney last traded at $185.51 as of May 3, 2021. One of the ways to assess Disney's valuation is to view it through the lens of sell-side analysts' target prices.

According to S&P Capital IQ data, 25 sell-side analysts had price targets for Disney ranging from as low as $147 to as high as $230. The mean target price for DIS is $208, which implies a 12% upside from the company's stock price of $185.51 as of May 3, 2021. Given the mean is subject to distortions as a result of outliers (e.g. certain analysts who might have not updated their target prices recently), the median target price of $218 might be a more suitable reference point.

The $218 median target price for Disney translates into an upside of +18% for the company based on its current share price. This valuation equates to consensus forward FY 2021 and FY 2022 P/E multiples of 111.8x and 44.0x.

Since the typical timeframe for sell-side analyst target prices is approximately a year or slightly longer, an one-year investment return of +18% implied by the median target price seems fair, but not exceptionally attractive. Also, the 44.0x FY 2022 P/E as per the median target price also seems rather rich as compared to Disney's five-year consensus forward next twelve months' P/E range of between 14x and 28x in the 2015-2019 period prior to COVID-19.

Given the success of Disney+ and the expected normalization of the theme parks business in time to come, I don't think Disney's shares are over-valued taking into account its future growth prospects. As I see a 15% annualized investment return as a "fair rate of return", consensus price targets (for +18% upside) suggest Disney's is about fairly valued at this point.

Disney Stock Forecast

Wall Street sees Walt Disney's top line expanding by +6%, 26%, and +11% to $69,025 million, $86,643 and $95,900 million, in FY 2021, FY 2022 and FY 2023 respectively according to S&P Capital IQ data. DIS is also expected to witness its normalized earnings per share decline by -4% from $2.02 in FY 2020 to $1.95 in FY 2021. Thereafter, market consensus anticipates Disney staging a strong earnings recovery, with its normalized earnings per share increasing by +154% and +28% to $4.95 and $6.33 for FY 2022 and FY 2023, respectively.

Consensus estimates can be evaluated by comparing them against Disney's pre-Covid financial numbers. Disney generated a revenue of $69,570 million in FY 2019, so the market expects the company to recover close to 99% of pre-Covid revenue levels by the end of the current fiscal year. I think this is fairly reasonable taking into account the robust subscriber growth for Disney+, and the fact that the theme parks business is on the path of recovery with its two theme parks in California having re-opened since the end of April 2021.

On the flip side, sell-side analysts think that Disney can only achieve 86% of its pre-pandemic earnings (FY 2019 normalized earnings per share of $5.77) by FY 2022, and only surpass pre-COVID earnings level by FY 2023. This is also understandable considering that there is significant operating leverage (larger decline in earnings relative to revenue for theme parks because of high fixed costs) within the theme parks business and that the company expects to invest substantially more in content for its video streaming services like Disney+ as mentioned earlier.

More importantly, DIS is guiding for Disney+ to turn profitable by FY 2024 with investments in content normalizing and the company harvesting the fruits of its investment with the monetization of its subscriber base. As such, the pace of the company's earnings growth should pick up in the years ahead running up to 2024, as evidenced by sell-side analysts' expectations of robust normalized earnings growth for Disney in FY 2022 and FY 2023.

Is Disney Stock A Buy Now

I like Disney as a business. With its integrated media and entertainment business model, DIS is able to monetize its intellectual property multiple times via various channels. For example, Disney can capitalize on the popularity of Mickey Mouse to sell theme park tickets, licensed products, and subscriptions to its Disney+ video streaming service. This makes Disney more attractive as a business as compared with other stand-alone streaming services companies, theme park operators and intellectual property owners.

However, as a stock investment, I need to analyze if Disney's annualized investment return is sufficiently attractive to deserve a BUY rating. Based on Disney's last traded price of $185.51 as of May 3, 2021, the stock can deliver an annualized return of +16% for investors if the company's share price reaches $250 in two years' time or 2023. I choose a price of $250 and a timeframe of two years, because the implied annualized return of +16% is close to what I deem as a fair annual investment return of around +15%.

Assuming Disney trades at $250 in May 2023, this will translate into a FY 2023 P/E multiple of 39.5x based on consensus' normalized earnings per share estimate of $6.33. Notably, Disney has never traded above 28x consensus forward next twelve months' P/E in the past decade prior to COVID-19. Although Disney+ has been very successful and the company expects it to be profitable by FY 2024, it is uncertain if the market will be willingly to re-rate Disney's valuations to a large extent on a sustainable basis in the future.

If and when COVID-19 is contained, the market might assign lower valuation multiples to video streaming services which are seen as beneficiaries of WFH trends driven by the pandemic. Also, an inflationary environment going forward could possibly see the under-performance of growth stocks vis-a-vis value stocks, with a potential valuation de-rating of high P/E stocks. This makes it challenging for Disney to achieve a two-year target price of $250 implying a 2023 P/E multiple of 39.5x.

Disney's key risk factors are a longer-than-expected time taken for its theme parks to recover to pre-COVID levels in terms of admissions, and Disney+ subscriber growth falling short of company's targets & market's expectations.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.