- The Disney stock has been trading at new lows, as investors mull on the prospects of its linear-to-DTC transition amid an accelerating pace of cord-cutting and intensifying streaming competition.
- Recent news on Disney’s doubled capex commitment to parks amid the already capital-intensive linear-to-DTC transition is also weighing on confidence in the company’s FCF prospects.
- However, the Disney stock creates a compelling risk-reward opportunity at $80 apiece, which in our opinion already captures company-specific and broader industry and macroeconomic considerations.
The article provides an analysis of The Walt Disney Company (DIS) stock and argues that it represents a compelling risk-reward opportunity at its current price of around $80 per share, despite facing several challenges:
- Linear Networks and Cord-Cutting: Disney, a leader in linear networks, is experiencing challenges due to cord-cutting trends. Pay-TV subscriptions are expected to decline by more than 8% in the current year, impacting Disney’s advertising and TV distribution business. The article suggests that Disney’s cash-driving linear networks business is at risk due to the rapid pace of cord-cutting.
- Direct-to-Consumer (DTC) Streaming: Disney’s DTC streaming efforts, led by Disney+, have been costly, with quarterly losses of nearly $1 billion over the past year. While management aims for DTC profitability by fiscal year 2024, the article’s base case forecast anticipates nominal profitability. The competitive DTC landscape and the need for opex margin improvements at Disney+ are cited as challenges.
- Content Licensing: Disney’s content licensing business is highlighted as being lumpy and dependent on the reception of theatrical film and TV production releases. Secular declines in linear TV viewership and content consumption channels are expected to impact this segment.
- Disney Parks, Experiences, and Products (DPEP): Disney is committing $60 billion in capital expenditures over the next decade for the expansion of its parks and experiences, including adding more ships to the Disney Cruise Line. While near-term headwinds, such as inflation and limited international visitation, are acknowledged, the article sees long-term potential in DPEP to capture previously unreached markets and reinforce international visitation.
- Valuation: The article’s valuation analysis calculates a base case price target of $85 per share, with a discount rate of 10.4% and an implied perpetual growth rate of 1.5%. Even if Disney adds additional debt for the Hulu buyout, the stock is expected to find support at around $80 per share.
In summary, the article acknowledges the challenges facing Disney, particularly in its linear networks and DTC transition, but believes that the stock’s current price already reflects these challenges. The analysis concludes that Disney represents a balanced risk-reward opportunity at or below $80 per share.
