Shares of media entertainment kingpin Disney (SAY) have trended lower lately alongside almost everything else in the market.
Disney’s first quarter was pretty magical, with strength in the video streaming business and significant signs of improvement in the parks.
COVID has been one of Disney’s worst headwinds to date. With an endemic in sight, however, there is reason to believe that the headwinds of COVID could be replaced by tailwinds as pent-up demand for experiences can be met for years to come.
With early evidence of a COVID recovery on the books and better than feared results on the streaming side, I remain as optimistic as ever on Disney stocks.
The upward reopening can still be discounted
Disney’s first-quarter revenue jumped 34%, with EPS numbers soaring into triple digits. There is no doubt that such growth numbers are unsustainable in the long term. That said, a shift to endemic could cause these numbers to rise for several more quarters.
Undoubtedly, the main question on the minds of investors is which variant comes after Omicron. Despite the groundbreaking success of Disney+, DIS stock remains a reopening game that will evolve based on news about the next steps of this pandemic.
The coronavirus is unlikely to go away forever, but seasonal vaccines could help propel COVID-19 into the endemic stage. For Disney Parks and Cruises, such an environment should be good enough for the recovery to progress towards, and perhaps beyond, pre-pandemic levels.
Disney+ could dethrone Netflix
When Netflix (NFLX) flopped after its recent quarterly results, CEO Reed Hastings was quick to point the finger at the competition as one of the main reasons for the failure.
Many major media and tech companies have followed Disney’s lead in space. Yet very few companies can match Disney and its extensive content library.
Marvel movies and shows have been very popular with Netflix viewers. With Disney expected to pull even more shows like this off Netflix, Disney+ might finally be able to tip the scales in its favor.
Disney has enviable brands and isn’t backing down from its content spending plan, which could continue to put pressure on rival Netflix. Disney+ has proven itself to be a worthy challenger in the direct-to-consumer (DTC) streaming space.
As the company continues to spend massive sums producing DTC content, I suspect that eclipsing Netflix as the king of streaming at some point is a possibility, maybe even a probability.
For now, Disney’s margins will continue to suffer. Content production and overseas expansions won’t come cheap. However, I suspect that such initiatives will pay off in the long run.
The Taking of Wall Street
According to TipRanks analyst rating consensus, DIS stock is a buy. Out of 19 analyst ratings, there are 14 buy recommendations and five hold recommendations.
Disney’s average price target is $193.89, implying a 31.9% upside. Analyst price targets range from a low of $165 per share to a high of $229 per share.
There is huge uncertainty around Disney, with margins to be taken in the medium term as COVID pressures continue to weigh.
Yet the longer-term future looks so bright. The company is getting aggressive with its Disney+ platform. As the pandemic gradually becomes rampant, we may see the perfect storm of tailwinds continue which has been a headwind rife for the past couple of years.
CEO Bob Chapek is doing a fantastic job. If Disney manages to dethrone Netflix while continuing to benefit from the return of the “experiences” tailwind, the upside potential could be considerable.
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