Source: PaxForex Premium Analytics Portal, Fundamental Insight
The relaunch of Walt Disney's theme parks and growth from three streaming services (Disney+, Hulu, ESPN+) were not enough to boost the stock in 2021. The stock price is now down 14.5% from a year ago, behind the 27% return of the S&P 500 Index.
The Parks segment has recovered well, with revenues nearly doubling year-over-year in its fiscal fourth quarter. However, slowing growth from Disney's main streaming service, Disney+, caused the stock to fall toward the end of the year. Below we discuss why the stock should return to growth in 2022.
The investment rationale for Disney depends on Disney+ growth, so, understandably, the stock trades in line with the rate of subscriber growth, but the market overreacted to Disney's results last quarter.
As Netflix has demonstrated over the past 10 years, content releases lead to subscriber growth. Disney began the year with "Wanda Vision," " The Falcon and the Winter Soldier" and "Loki," all original series that were released as Disney+ exclusives. Growth followed, with Disney adding 12.4 million subscribers in the third quarter ended July 3.
The fourth quarter was quiet for new releases, and as a result, subscriber growth slowed to 2.1 million. Like clockwork, the stock fell.
Market participants seem to have extrapolated one quarter's growth into the future, which makes no sense. Of course, analysts are estimating the company's performance based on management's projections that Disney+ will reach between 230 million and 260 million subscribers by the fiscal year 2024. Disney has three years to double the number of subscribers, but that shouldn't be difficult given that Disney has come this far without the deep development of the rich content channel it introduced a year ago.
Disney only started using the channel last month. Recall that Disney previously announced 10 original series from Marvel and Star Wars, as well as 30 live-action shows from Disney Animation Company and Pixar over the next few years. In November, Disney released Peter Jackson's documentary "The Beatles" and Marvel's "Hawkeye." But the major release came on Dec. 29, a new Star Wars original series called "The Book of Boba Fett."
Disney is wrapping up 2021 with a bang, but there's more on the way that could be a blast for subscriber growth.
During the fourth-quarter earnings report in November, Disney CFO Christine McCarthy reminded investors that they don't expect "[subscriber] growth to necessarily be linear from quarter to quarter." McCarthy implies that subscription growth should follow the timing of new content releases.
To that end, Disney will nearly double the amount of original content from its top brands in the fiscal year 2022. Much of that content will appear later this year, as McCarthy said: "We expect net growth in Disney+ subscribers in the second half of fiscal 2022 to be significantly higher than in the first half of the year."
Disney's previous forecast for content production spending was $8 billion to $9 billion by the fiscal year 2024. Company executives said that the range will now be higher as they increase spending on local and regional content.
Disney is borrowing from Netflix's experience. The latter has been very successful in expanding into international markets, focusing on producing content in local languages. Pleasingly, some of these shows, such as "La Casa de Papel" and "The Squid Game," have led to high viewership in the United States and Canada. Localized content can help grow subscribers worldwide.
CEO Bob Chapek said the company has more than 340 local original films in various stages of development and production on direct-to-consumer platforms, including Hulu and ESPN+. They are scheduled for release over the next few years.
To sum it all up, the Disney+ service is undervalued by the market right now. The stock is currently trading at just over 20 times Disney's peak earnings in fiscal 2018. But given Netflix's 23.5 percent operating margin, Disney+ should make a big contribution to Disney's bottom line. The service is projected to reach profitability by the fiscal year 2024.
Moreover, Chapek's experience at Disney allows investors to expect margins across the business to increase over time. Therefore, this leading entertainment company should return to growth in 2022.
As long as the price is above 147.70, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 155.20
- Take Profit 1: 163.90
- Take Profit 2: 167.50
Alternative scenario:
If the level of 147.70 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 147.70
- Take Profit 1: 141.70
- Take Profit 2: 138.20
