Is Disney Stock Poised To Rally Further After Strong Earnings?

+50.75%
Upside
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Market
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Trefis
DIS: Walt Disney logo
DIS
Walt Disney

Disney (NYSE:DIS) reported a stronger than expected set of Q3 2022 results on Wednesday, sending the stock up by about 8% in pre-market trading on Thursday. While revenue rose 26% year-over-year to $21.5 billion, adjusted EPS came in at $1.09, up 36% versus last year. Revenue growth was driven primarily by a rebound in the company’s theme parks and resorts business, which saw sales rise by about 70% driven by strong pent-up demand for travel and outdoor activities following Covid-19. Notably, occupancy levels at the company’s U.S. hotels surged to about 90%, while revenues from theme parks more than doubled, as attendance grew 93% versus last year with per capita spending also growing 10% versus last year. Disney’s streaming business – although still loss-making – also appears to be making solid progress. Disney+ ended the quarter with a stronger than expected 152.1 million subscribers, up by 31% versus last year. Disney is also bumping up pricing on Disney+ to $11 per month in the U.S., up from the current $8 per month from December while planning to introduce a new ad-supported tier at $8 per month. That said, the company has trimmed its 2024 outlook for streaming subscribers by 15 million, with the upper end of guidance now standing at 245 million, down from a previous estimate of 260 million.

Now even following the after-hours rally, Disney stock remains down by about 22% year-to-date and by over 35% from the all-time high seen last year. This decline is driven by the company’s big spending on its steaming content (about $8 billion for this year) at a time when investors have been increasingly prioritizing cash flows amid rising interest rates. Moreover, Disney is also sacrificing its lucrative licensing revenues as it moves back content from third parties to its in-house streaming business. The broader macro slowdown and a public relations crisis relating to its handling of Florida’s controversial Parental Rights in Education legislation have also hurt Disney stock to an extent.

However, we still think Disney stock looks like a buy for a couple of reasons. Investors probably shouldn’t worry too much about the rising investments Disney is making into its content and streaming operations. Unlike players such as Netflix, which monetizes content investment solely via monthly subscription fees, Disney has a much larger value chain, given its theatrical business, theme parks, merchandise, and licensing operations. Disney’s parks business is also likely to drive the company’s growth and profitability in the near term. For example, per capita spending in Disney’s parks has also soared by 40% in Q3 versus the same period in the pre-pandemic era, indicating that these assets could emerge stronger than pre-pandemic levels, generating sizable cash flows for Disney and potentially masking some of the impacts of rising content investments.

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Disney’s stock trades at about 30x consensus 2022 earnings and about 22x consensus 2023 earnings and things should only get better as streaming eventually contributes to Disney’s bottom line (likely from 2024). We value Disney stock at about $150 per share, which is roughly 22% ahead of the current market price. See our analysis of Disney valuation for more information on what’s driving our price estimate for Disney and how its valuation compares with peers. See our analysis of Disney revenue for a closer look at the company’s key revenue streams and how they have been trending.

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Returns Aug 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 DIS Return 6% -27% 8%
 S&P 500 Return 2% -12% 88%
 Trefis Multi-Strategy Portfolio 5% -9% 260%

[1] Month-to-date and year-to-date as of 8/11/2022
[2] Cumulative total returns since the end of 2016

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