Well known for its theme parks and animations as well as live-action films, Walt Disney Co (NYSE: DIS) is one of the world's biggest and most recognized companies. In recent years, Disney expanded into the world of streaming with the launch of its first streaming service, Disney+, in November 2019.
Disney's move into the fast-growing streaming industry was applauded by Wall Street and helped the company weather the aftershocks of the pandemic, blowing past Wall Street expectations and helping Disney stock to beat analyst expectations.
But the Disney share price took a large hit between July 2021 and July 2022, dropping around 40%. The landscape is changing fast, and Disney must stay agile to keep up. Is DIS stock a good investment for retail investors today?
Fundamentals of Disney stock
Since Netflix pioneered online streaming in 2007, every media company in the world has rushed to get in on the action, but none of these companies have gone as hard and as fast as Disney.
In addition to Disney's existing backlog of content, which it did not need to pay for, it also has the creative and financial clout of some of the most respected movie production companies in the world, such as Pixar and Lucasfilm.
The competitive advantage Disney has over other companies cannot be overstated. The Disney+ service provides unrivaled access to some of the most successful films of all time, especially children's movies. Many of these films can't be found elsewhere without paying for each one individually.
Furthermore, the company has been on a buying spree acquiring recognized brands such as Star Wars and the Marvel franchise, which is only mid-way through filming a six-phase production schedule.
By July 2021, the Disney+ streaming service had added 8 million new subscribers globally. However, the market premium on this growth wasn't to last, with the share price dropping as inflation concerns took hold. The result is the high valuation multiple on DIS stock has fallen. It now trades on a P/E of 66 with a forward earnings multiple of 21. It's not exactly cheap, but the risk of overvaluation has abated.
However, Disney stock does not come with a shareholder dividend, so investors want to see the likelihood of growth to make investing worthwhile.
Of course, the Walt Disney Company generates revenue from a lot more than just Disney+. It operates cruises, theme parks, movie theatre film releases, ESPN+, Hulu, and more. Cruise line and park revenues were hard hit by the pandemic but are now showing signs of recovery.
On the other hand, ESPN, is causing concern with the mounting costs involved in winning contracts and bidding on live sporting events. Competition is rising in the form of Apple (NASDAQ: AAPL), Amazon (NASDAQ: AMZN) and even Alphabet's (NASDAQ: GOOGL) Google, so change in the way Disney operates ESPN is likely to be forthcoming.
What is the bull case for Disney?
A 2021 report predicted Disney+ will be the world's largest streaming service by 2026. The report estimates that by 2026, Disney will have a global subscriber base of 294 million compared to Netflix's 286 million.
Indeed, it appears to be on track. In fiscal Q3 2022, Disney added an incredible 14.4 million Disney+ subscribers taking its total subscriber numbers to 221 million across its streaming offerings. This accounts for 152.1 million Disney+ subscribers, 22.8 million ESPN+ subscribers, and 46.2 million Hulu subscribers.
Much of the company's future success will be determined by growth in the Indian market. India is a battleground for streaming services as the country has over one billion consumers, representing the largest single market globally outside of China.
Disney's strategy in this market has been to partner up with an existing business. Hotstar streamer is the firm's partner in India, which is already established and has exclusive streaming rights to the highly popular Indian Premier League cricket competition. This factor differentiates it from competitors.
Unlike Netflix, Disney has always been a content business.
Disney owns the content it can sell to consumers. It does not have to try and outbid other outlets for content rights. This suggests a dollar of revenue generated by Disney+ is far more valuable to investors than the same dollar generated by Netflix, making Disney an attractive investment opportunity.
What is the bear case for Disney?
While Disney's expansion across India will help power the growth of the streaming service for the next few years, according to the previously mentioned report, due to the lower subscription cost, global revenues for Disney+ will only be at $20.76bn – half of the $39.52bn Netflix is projected to make by 2026.
Given that Disney isn't an essentials company like Amazon, its resilience could be questioned in an economic downturn. But while Disney may have been through short-term struggles during the global pandemic, it has the tools to get back to growth and has stood the test of time for several decades.
Investors looking to buy Disney stock now may experience some volatility, but this could present an excellent opportunity to acquire Disney stock.
Should I invest in Disney stock?
Disney stock may seem expensive today, but the power of streaming services lies in the ability of the service to increase prices.
Netflix has successfully tested this model over the past decade. The company had been able to raise prices steadily without losing a large number of subscribers prior to this year. However, it has lost over a million in recent months.
Netflix has since brought in an ad-supported tier. And Disney plans to do the same. It will launch a new ad-supported streaming tier in the US later this year, which will launch in the UK in 2024.
If Disney can raise subscription costs to consumers by 5% to 10% every year, with a subscriber base of more than 200 million, Disney+ revenues could grow exponentially.
Despite the short-term volatility that could be expected with Disney stock, investor confidence remains high for its future potential.
Article updated: Aug 2022