Disney+: After A Stellar Debut In The Streaming Space, Has Disney’s Stock Reached Its Fair Value?

Walt Disney (NYSE: DIS) benefited from a stellar first quarter for its newly launched Disney+ streaming service, launched in November 2019. The company reported total revenues of $20.86 billion in Q1 2020, reporting y-o-y growth of 36%. Media networks revenue jumped 24% to $7.36 billion, though ESPN saw a decline. Parks revenue increased 8% to $7.4 billion, though Hong Kong saw a decline as political unrest hit attendance. Studio revenue more than doubled to $3.76 billion, helped by massive blockbusters – Frozen 2 and Star Wars. However, the highlight of the announcement was Disney+ having 26.5 million paid subscribers by the end of Q1 2020, topping the company’s own highest expectations. 50% of Disney+ subscribers came via disneyplus.com, where the company doesn’t share revenue with others, while 20% from Verizon and the rest from other services like iTunes. The company’s earnings came in at $1.53 per share for Q1 2020, beating market expectations of $1.43/share. Trefis believes that better-than-expected earnings and a promising debut for Disney+, coupled with a positive outlook with expansion plans in India, will help Disney’s stock price to increase in the near term.

Trefis has a price estimate of $154 for Disney’s stock, which reflects an upside of >9% from its current stock price of $141 as of February 7, 2020. You can view the Trefis interactive dashboard – Walt Disney Valuation: Expensive or Cheap? – to understand the various factors driving a higher stock price estimate for Disney, and alter the key assumptions to arrive at your own price estimate for the company.

A] Estimating Revenue

• Disney has added over $10 billion to its revenue base in FY 2019, led by growth across all its operating divisions.
• However, the biggest change in revenues was driven by the sharp rise of $6 billion in the direct-to-consumer division due to higher advertising sales driven by consolidation of Hulu operations and at Disney’s international channels, along with higher subscription fees due to Hulu and Fox’s international program sales and higher fees for ESPN+.
• Disney is expected to add another $11.8 billion to its top line as revenue is projected to rise to $81.4 billion in FY 2020 and further to $86.6 billion by FY 2021.
• The primary factor behind this healthy growth is likely to be continued impressive performance of Disney+
• Disney+ is expected to debut in India via Disney’s Hotstar on March 29, 2020. In addition to India, the service will also debut in key European markets in March.
• Increased international penetration is likely to drive revenue growth going forward.

To understand how each of Disney’s operating divisions is expected to perform over the next two years and the company’s revenue trend in comparison to its peers, view our interactive dashboard Walt Disney Revenues: How Does Disney Make Money?

B] Estimating Net Income

• Net income decreased by $1.5 billion in FY 2019 despite healthy growth in revenue, driven by a sharp drop in net income margin, from 21.2% in 2018 to 15.9% in 2019, mainly due to expenses related to the Fox acquisition.
• Margins are expected to drop further to 13.1% in 2020 on the back of expenses related to the launch of Disney+. However, lower margins could be partially offset by higher revenues to see a slight drop in net income from $11.1 billion in 2019 to $10.7 billion in 2020.
• Margins are expected to see an uptick in 2021.

C] Drop In EPS

• Disney’s EPS declined from $8.36 in FY 2018 to $6.64 in FY 2019, driven by a drop in net income and higher share count. Number of shares increased from 1.5 billion in FY 2018 to 1.7 billion in FY 2019, due to shares that were issued in connection with the acquisition of 21st Century Fox.
• We estimate a further drop in EPS to $6.40 in 2020, led by lower net income and stable share count.

D] Stock Price Estimation

• As per Walt Disney Valuation by Trefis, we have a price estimate of $154 per share for the company’s stock.
• The stock price estimate is arrived at by using the discounted cash flow valuation technique, which you can find in Disney’s detailed financial model here.
• Based on projected EPS of $6.40 per share and a stock price estimate of $154 per share, Disney’s forward price-to-earnings (P/E) multiple stands at 24x.

To understand how Disney’s P/E multiple over the years stands in comparison to its major peers, view our interactive dashboard analysis.

See all Trefis Price Estimates and Download Trefis Data here

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