Walt Disney (NYSE:DIS) — a company that has become bifurcated amid the pandemic with a surging streaming business and a stumbling parks business — reported first-quarter numbers in mid-February that didn’t surprise anyone. Over the past three months, Disney’s streaming services Disney+, ESPN+ and Hulu grew like clockwork. Disneyland and Disney World parks, though, continued to struggle.
But, if you zoom out and look at the big picture here, Disney’s earnings confirmed that everything is, indeed, trending in the right direction for the media giant.
Indeed, there’s reason to believe that one day in the not-too-distant future, the Magic Kingdom will have more magic that it has in decades.
That’s why I think the right move here to take a buy-and-hold stance with Disney’s stock. The fundamental business trends here are only going to get better and better as we head deeper and deeper into 2021.
DIS Stock: Disney+ Is on Fire
As has been the case ever since the pandemic started, Disney+ ended 2020 on fire.
The streaming service added 21.2 million subscribers in the quarter. For comparison, over the roughly same time period, Netflix (NASDAQ:NFLX) added about a third that at just 8.5 million subs.
Disney+ now has 94.9 million subscribers. The service started in November 2019. Thus, in just over a year, Disney+ has added about 100 million subscribers. Again, for comparison purposes, it took Netflix just over three years to add its latest batch of 100 million subs.
Clearly, this business is firing on all cylinders.
There are some concerns that discounting is driving the growth. After all, most of the sub-growth firepower in the quarter came from a heavily promotional Disney+ Hotstar deal in India. That’s why Disney+ ARPU dropped 28% in the quarter, and 100%-plus subscriber growth in the DTC business turned into just 73% revenue growth.
But this is the right long-term strategy. Sign subscribers up with bargain pricing. Hook them with compelling content. Get them to stick as you gradually hike prices over time.
Netflix executed that strategy perfectly over the past decade, growing both subscribers and ARPU simultaneously thanks to its compelling suite of original content. Disney has the firepower, resources and the expertise to create equally compelling content. As such, Disney could execute flawlessly on this strategy in the 2020s.
Big picture: Disney’s streaming business is on the right track. That bodes well for DIS stock.
Linear Networks Business Holding Up
To the surprise of many, Disney’s linear networks business is holding up just fine amid the pandemic and secular cord-cutting trends. In the quarter, linear networks revenue rose 2% while operating profits fell just 4%.
This resilience in the face of enormous headwinds speaks to one overarching truth: There is still robust demand for live TV programming (like The Bachelor) and live sports (like the NFL and NBA).
To that extent, while viewers’ watching habits will shift over the next decade from linear TV to streaming TV, what those viewers watch will not change. That is, in 2030, we will all just be streaming The Bachelor and NBA games.
The financial implication for Disney, of course, is enormous.
This reality means that Disney’s linear networks business may not be in a secular decline, after all. Instead, it’s in a transition, from being distributed through linear TV packages, to being distributed through streaming TV platforms. This transition is a “no-loss” transition. By 2030, Disney’s live TV content will be worth just as much as it is today — and maybe more because streaming TV offers more advanced, more efficient programmatic advertising capabilities.
That’s really just a long-winded of saying that the biggest headwind for DIS stock — cord-cutting — may not end up being that big of a headwind when all is said and done.
Parks Positioned for a Rebound
Of course, Disney’s Parks & Experiences business had a terrible quarter. Revenues dropped more than 50% year-over-year, and the business printed an operating loss of over $100 million as many of the company’s parks were closed during the quarter (and the ones that were open ran at limited capacity).
But here’s the thing…
These parks won’t remain closed forever. They will reopen in 2021/22 as more and more people get vaccinated. Considering that more people globally have already been vaccinated already than people that have been diagnosed with Covid-19, there is now a visible pathway towards 80%-plus global vaccination within the next 12 months. That means there is also a visible pathway towards Disney’s parks reopening without many restrictions within the next 12 months.
When they do reopen, there will be robust pent-up consumer demand to attend those parks.
The evidence? Look outside. I live in California. Dining was shut down for a few months in the dead of winter. It just reopened a few weeks ago, and restaurants have been packed ever since. It’s tough to even get a reservation on a weekend night.
Consumers are itching to do something. Anything. Once Disney parks safely reopen again, demand to go to those parks will be enormous. That pent-up demand will create a big tailwind for DIS shares.
Bottom Line on Disney Stock
Today, Disney has a red-hot streaming business with questionable economics, a flattish linear networks business and a parks business in free-fall.
By the end of the year, Disney will have a still-red-hot streaming business with much improved economics, a rebounding linear networks business and a parks business that is in hypergrowth mode thanks to easy laps and pent-up consumer demand.
In other words, the fundamental business trends underlying the Magic Kingdom will only get much, much better over the next 12 months.
As they do, Disney’s stock price will keep grinding higher.
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Source: Investor Place