We are maintaining our "buy" rating on Walt Disney Co. (DIS) and raising our target price to $200 from $145, explains Joseph Bonner, a leading financial analyst with Argus Research.
The pandemic is damaging Disney’s park and theater businesses, though advertising revenue has begun to recover with the return of live sports events and other new programming.
The new stay-at-home paradigm has also helped drive viewers to the Disney+ video streaming service, making it a viable streaming player in the first year of its launch.
While the ultimate severity and duration of the pandemic are unquantifiable, even for management, we believe that Disney has the assets, intellectual property, and management team needed for a robust revival when COVID-19 recedes.
The old saying that “luck favors the prepared” can be applied to Disney’s November 2019 launch of the Disney+ video service. The launch, exemplified by rapid subscriber acquisition, was a success even before the pandemic.
Pandemic lockdown restrictions and the resulting change in consumer behavior have only increased the use of the service, such that Disney+ has already reached its FY24 subscriber goal.
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In December, Disney held an Investor Day that highlighted the strategic prominence of streaming to the future of what is arguably Hollywood’s most successful studio, and the centrality of the Disney+ streaming video service to the new paradigm.
Disney+ had 87 million subscribers, near the high end of its FY24 guidance of 60-90 million; ESPN+ had 11.5 million subscribers, within its FY24 guidance of 8-12 million; and Hulu had 39 million subscribers, approaching its FY24 guidance of 40-60 million. Hulu also had 92 million monthly advertising-supported viewers.
As movie theaters remain closed or operate at severely reduced capacity due to the pandemic (with only one-third of theaters open in the U.S.), theatrical releases will likely continue to be rescheduled or distributed directly through Disney+ or Hulu.
Disney has demonstrated once again the power of combining high-quality popular branded content with strong distribution execution. While the costs of the direct-to-consumer strategy are high, we see it as more than just a necessary defensive move against a surging Netflix (NFLX).
In fact, Disney is the first Hollywood studio to seize the initiative in a rapidly changing consumer entertainment environment that is moving toward streaming digital video with anytime/anywhere accessibility. It is being followed by almost all of its competitors.
