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You are getting Disney+ for free
2 February 2022



BHP revised its proposed bid for Anglo American (AGL), the updated terms include:

We believe DIS is currently offering a very compelling entry point into a top-quality company with huge brand power; supporting our investing theme of Services & Experiences plus it has significant pricing power.

At current levels DIS is trading at a large discount to its historical valuation and you are getting its Direct-To-Consumer business (Disney Content streaming) for free. On our conservative estimates, DIS offers between 79-95% upside over the next 2 years. DIS has historically traded at an average PE of 18x in the 5 years prior to the launch of its DTC (Direct To Consumer) streaming business.
If we exclude the DTC business, DIS will earn $7.55 this year (2022) and $8.78 in FY24. Using our FY24 estimate for DIS’ Media and Parks Business (ex DTC) suggests that DIS is currently trading on a forward PE of 15.4x; a valuation at the bottom end of DIS’ historical range. Using an average PE of 18x gets you to a price of $158 – 16% upside from current levels – and you are getting the DTC business for free.
DIS total (parks & media) FY 22 Total excl. DTC FY 24
Revenue 63,693.41 69,261.27
Expenses 45,499.88 50,041.47
OP 18,193.53 21,443.64
Net Interest (912.00) (1,340.14)
PBT 17,281.53 20,103.51
Tax 3,629.12 4,221.74
PAT 13,652.41 15,881.77
SoS 1,809.00 1,809.00
EPS 7.55 8.78
Forward PE 18 18.00
Price Target 135.84 158.03

What is the DTC business worth?

The Direct-to-Consumer (DTC) business is DIS’ streaming service, and a pivotal opportunity for the company. It continues to grow from strength to strength with a total of 179 million subscribers. (118.1 million Disney+ subscribers, 17.1 million ESPN+ subscribers and 43.8 million Hulu subscribers). Management is targeting 230 million to 260 million Disney+ subscribers globally by the end of FY24, as it extends coverage to more than 50 new countries, with total paid subscribers reaching around 300-350 million FY24. The company has set a goal for Disney+ to have a presence in at least 160 countries in FY23.

The DTC business is currently making a loss but is forecast to turn a profit in FY24; this will be a pivotal moment for the DIS stock.

Putting a value to DIS’ DTC business is tricky, but we use Netflix as a guide. Netflix’s share price is down 50% in the last 3 months and is currently trading at a Price/Subscriber and Price/Rev of $771 and 6x, respectively. At its peak, NFLX trades at a P/Sub of $1200 and a P/Rev of 9.5x.

Being conservative, we use a P/Sub range of 500-600 and a P/Revs range of 4-6x for Disney. Applying these valuation ranges to current DTC numbers gets you to a $30-$54/shr value for the DTC business on a stand-alone basis. Using the FY24 forecast numbers, gets you to a range of $66-$95/shr.

Valuation based on current metrics
P/SUB 500 550 600
Implied Valuation (‘000) 59,050,000 64,955,000 70,860,000
P/shr 32.49 35.74 38.98
P/Sales 4.00x 5.00x 6.00x
Implied Valuation (‘000) 65,276,000 81,595,000 97,914,000
P/shr 35.91 44.89 53.87
Valuation based on 2024 Tgt
P/SUB 500 550 600
Implied Valuation (‘000) 120,000,000 132,000,000 144,000,000
P/shr 32.49 35.74 38.98
P/Sales 4.00x 5.00x 6.00x
Implied Valuation (‘000) 115,200,000 144,000,000 172,800,000
P/shr 35.91 44.89 53.87

Adding this all together gets you to a target price of between $237-$253 for DIS stock, based off FY24 estimates – representing 75-87% upside from current levels.

Disney theme parks positioned perfectly to benefit from pent up demand

The Disney Parks business has gone through a tough time over the last 2 years with Covid restrictions severely impacting visitor numbers, and subsequently revenues and income levels were 64% and 7% compared to 2019 pre-Covid levels, respectively. Typically, the Disney Parks segment accounts for 40% of DIS operating income, however that dropped to less than 5% in 2020/21.

Given the limited movement people have experienced during the past 24 months, there is huge pent-up demand to get out of town and enjoy experiences again; Disney theme parks should be a big beneficiary of this pent-up demand. Management have done a fantastic job taking costs out of the parks business, while at the same time adding technology, which should drive incremental margins when visitor numbers begin to normalise in 2022 and beyond. We have estimated that Disney will surpass 2019 pre-Covid revenues by 2023, and margins will move higher given the new investment in the business.

We expect the contribution from the Disney Parks business to revert to historical levels and eventually surpassus it over the next 2 years, driving operating income growth into the future.