COVID-19 has uniquely impacted the Walt Disney Company (DIS), by simultaneously acting as a drag on the company’s legacy media and travel businesses, while catalyzing a five-year pull-forward in adoption of its streaming service.
The company has strong forward-looking prospects, with early signs of approaching normalcy in some theme parks and potentially synergies in the form of direct-tie-ins between upcoming streaming content and theatrical releases. Despite Disney’s already impressive rally in excess of 100% off the March 2020 lows, Disney appears to be poised for continued outperformance.
The Disney+ Disruption of the Historical Operating Model
Theme Parks & Experiences was one of the most significant growth stories from fiscal year 2010 to 2019, with the unit expanding from roughly 28% of sales to nearly 41%. It was this explosion in growth that led the division head, Bob Chapek, to be promoted to CEO last February.
In 2019, the company derived over 50% of sales from theme parks, cruise ships, and studio entertainment, with it managing to maintain these levels despite the COVID-19 pandemic. This miracle is almost entirely attributable to the monumental growth of Disney+, which expanded division sales from ~$9.39 billion to ~$16.97 billion (~81% year-over-year). This makes the Disney streaming unit approximately the same size as the Parks & Experiences division was in 2016 (also the year Bob Chapek was named as division lead).
A New Operating Profile Warrants a New Multiple
In October of 2020, Third Point Capital, one a Disney’s largest investors, urged the company to focus its capital expenditures on expanding the Disney+ unit, citing the potential for multiple expansion in alignment with the current streaming leader, Netflix (NFLX). Management heeded many of these suggestions, which they disclosed during the December investor presentation. Subsequently, this drove the valuation multiple higher.
This price-action can be seen as evidence that the company is not strictly pricing forward-looking post-crisis performance, as a similar multiple expansion event occurred following the initial reveal of Disney+ in March of 2019. Therefore, the current multiples reflect a fair value for the business given this same valuation was afforded long before the massive audience pull-forward, and that it should hold through the recovery of the adversely impacted divisions.
Early Signs of Parks Recovery
The next significant leg in Disney shares is likely to be driven by a recovery in theme parks and theatrical releases. One of the first signs of recovery in Disney’s parks division appeared in late November, with the company offering discounted rates of up to 40% to Disney Visa cardholders. This is significant as discounted rates have historically been a staple of the company’s post-recession protocol, and seeing an offer of the magnitude extended to cardholders, is not only unusual, but a tactful method of catalyzing attendance. This effort appears to be working as the Google Trends search data shows interest in the term “Disney World Discount” has recovered to mean for the first time since the arrival of COVID-19 in Europe. Finally, the recent return of the park hopper upgrade signals a gradual return to a less restrictive visitor experience and upsell opportunities.
Disney+ & Theatrical Release Synergies
‘WandaVision’ debuted on January 15th as the first Disney+ program to tie directly into the Marvel Cinematic Universe (MCU) franchise of tentpole blockbusters. Media Play estimates that the program was streamed by 1.6 million households over its opening weekend, which is quite the triumph when considering the platforms’ flagship program, ‘The Mandalorian’, premiered its second season to 1.01 million households in October.
Differentiating the MCU from other franchises is the element of interconnectivity, making each piece of content a “must see.” While the success of titles like the record breaking ‘Avengers’ franchise, might have been intended to draw an audience to Disney+ shows like ‘WandaVision’ and the upcoming ‘Falcon and the Winter Soldier’, these shows could very well drive hesitant audience members back to theaters to see upcoming titles like ‘Black Widow’ and ‘The Eternals’, which both will be given some form of pre-streaming theatrical release.
Wall Street’s Take
Wall Street is overwhelmingly bullish on Disney, with 17 of 22 analysts giving the company a Buy rating. Therefore, the stock boasts a Strong Buy analyst consensus. Additionally, based on the $187.94 average price target, shares could surge 9% in the year ahead. (See Disney stock analysis on TipRanks)
Given the previously outlined strength of the Disney+ rollout, combined with a hypothetical future full recovery in the Parks & Experiences business, the average price target seems conservative and realistically attainable. Furthermore, continued signs of the recovery should diminish some pessimism on the sell-side. Thus, the Walt Disney company remains a top pick in 2021.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.