Disney had a blowout quarter but can it continue to shine?

Last week, Disney released its fiscal first-quarter 2022 earnings and the shares popped following the release. It was in stark contrast to the previous quarter when the shares had crashed after the earnings release.

Disney has recouped some of its recent losses and is now down about 3.5% for the year. However, it is still down 26% from its 52-week highs and is in bear market territory. What’s the forecast for the shares in 2022 and are they a good buy at these prices?

Disney reported stellar earnings

Disney reported revenues of $21.82 billion in the fiscal first quarter, which was 34% higher than the corresponding period last year. The revenues were ahead of the $20.9 billion that analysts were expecting.  The rise in revenues was led by the Parks segment whose revenues more than doubled to $7.2 billion. The company had reponed its Parks in the US last year but they have since been operating at a lower capacity.

Disney’s Media and Entertainment distribution segment posted revenues of $14.6 billion in the quarter, a YoY rise of 15%.

Subscriber number swell

Apart from the Parks segment, markets were interested in the numbers of the company’s streaming business, which had particularly disappointed in the previous quarter. However, the company more than made up for the dismal fiscal fourth quarter and added almost 12 million Disney+ subscribers in the first quarter. It ended the quarter with 129.8 million Disney+ subscribers while analysts were expecting the metric at 125.75 million.

Disney’s strong performance in streaming came in the backdrop of Netflix’s dismal performance. Despite spending aggressively on new content, Netflix’s subscriber growth hasn’t been as high as expected. Its guidance for the first quarter spooked investors and the shares tanked following the earnings release. Netflix shares recouped some of the losses thereafter as Bill Ackman bought some shares.

Disney reported higher ARPU

Disney’s net subscriber adds especially look encouraging as the company had previously said that it expects to add more subscribers in the back half of the fiscal year. Its ARPU (average revenue per user) in the US and Canada also rose to $6.68 in the quarter, which was ahead of the $5.80 that it reported in the corresponding quarter last year. The consolidated ARPU also increased 9% to $4.41 over the period.

Like Netflix, Disney also offers lowered priced subscription service in emerging markets like India in order to attract more customers. Netflix recently slashed its subscription price even further in India while increasing the prices in the US.

Bob Chapek on earnings

Commenting on the earnings, Disney’s CEO Bob Chapek said, “We’ve had a very strong start to the fiscal year, with a significant rise in earnings per share, record revenue and operating income at our domestic parks and resorts, the launch of a new franchise with Encanto, and a significant increase in total subscriptions across our streaming portfolio to 196.4 million, including 11.8 million Disney+ subscribers added in the first quarter.”

Disney has been pivoting towards streaming and in 2020 it restructured the business to put streaming at the centre. Chapek reiterated his views in the fiscal first-quarter earnings call and said, “We do not subscribe to the belief that theatrical distribution is the only way to build a Disney franchise.”

Streaming

Disney sees the total addressable market as 1.1 billion households across the globe. The company has outlined aggressive growth plans for its streaming business and expects Disney+ subscriber numbers to rise to between 230-260 million by the fiscal year 2024. After accounting for Hulu and ESPN+ subscribers, the company expects to have been 300-350 million subscribers by the end of 2024.

Wall Street analysts are bullish on Disney shares

Wall Street analysts seem impressed with Disney’s earnings release. MoffettNathanson analyst Michael Nathanson was impressed with the company’s Parks segment. He said, “When we reflect about the massive surprise that Disney delivered in F1Q 2022, we are primarily focused on the incredible beat in Parks profits that came from the most amazing set of drivers that we have ever seen.” Almost all the incremental revenues that the segment posted as compared to the previous quarter, flew to the net profit which looks encouraging.

Morgan Stanley also seemed impressed with the performance. Analyst Benjamin Swinburne said, “Disney is achieving this success despite operating below capacity and without the benefit of international tourism, thanks to over 40% growth in per capita spending relative to 2019.”

JPMorgan sees Parks segment rising to pre-pandemic levels

JPMorgan which has an overweight rating and a $200 target price on Disney said “We maintain that Disney should see Parks margins exceed pre-pandemic levels in F23 as Disney continues to enhance the guest experience with new attractions and improved operations.”

Bank of America also sounded bullish on the results and said “A big premise of our bull thesis was predicated on the recovery in Theme Parks and inherent operating leverage in the model and FY1Q results is a key validator of that view. Near-term catalysts include: (1) continued theme park improvement/recovery and (2) DTC rollouts in new geographies along with increased content output in 2HFY22 and potential price increases.”

Notably, analyst action post Disney’s fiscal first-quarter earnings release is in stark contrast to what we saw after the previous earnings call. Back then, several analysts including those who were otherwise bullish on the shares had lowered their target price.

Disney share price forecast

According to the forecast estimates compiled by CNN Business, Disney has a median price target of $191, which is a premium of 27.8% over current prices.

Of the 29 analysts covering the shares, 19 have rated the shares as a buy or higher, while the remaining 10 analysts have a hold or equivalent rating on the shares. None of the analyst has a sell rating for the shares.

Should you buy Disney shares?

In the fiscal first quarter, Disney’s Parks as well as streaming business reported strong sets of numbers. Both these segments should post good numbers in the remaining quarters of this fiscal year. As the omicron wave subsides, we could see a rebound in international travel which would lead to higher attendance and profits at the Parks segment.

The streaming business should also continue to do well even as the competition is intensifying in that space. Even Netflix which always maintained that rising competition in streaming is a sign of the strong prospects in the industry also admitted to competitive pressure in its fourth-quarter earnings call. Netflix’s valuation multiples have seen a derating following the earnings release and many now question its very inclusion in the FAANG pack.

Talking of Disney, the shares now trade at an NTM (next-12 months) PE multiple of 31.5x which seems reasonable. The shares look a good buy at these prices and are a play on both the reopening story as well as the structural pivot from linear television to streaming.