Is it time for The Walt Disney (NYSE:DIS) bulls to make some noise? The House of Mouse’s recent fiscal fourth-quarter earnings report had plenty to like about it and showed the company’s cost-cutting endeavors and attempts to improve the profitability profile are working.
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That was certainly evident to Deutsche Bank analyst Bryan Kraft, who thinks Disney is now heading in the right direction.
“We believe the company has turned a corner, shifting from four consecutive quarters of flat to down OI (operating income) growth, to solidly positive OI growth in F4Q that should continue in F2024 and F2025,” said the analyst. “While the Theme Parks have been the earnings growth juggernaut of Disney ever since 2022 and continue to be strong, it is DTC (aka streaming) that is raising prices, better managing costs, cracking down on account sharing, and leaning into CTV advertising more aggressively to drive an improving OI trajectory.”
With the ongoing resurgence in post-pandemic demand, Kraft forecasts more growth ahead for Disney’s international parks business. But, as mentioned above, it is the continuous improvement in the DTC (direct-to-consumer) segment – what constitutes streaming – that is impressive and more than makes up for the decline in its linear Entertainment network profit pool.
Disney’s recent segmentation emphasizes the significant size difference between the DTC and linear businesses within the Entertainment division. Kraft’s forecasts for F2024 DTC revenue of $24 billion and a path toward further growth with linear at $11 billion and set for further declines. Additionally, Kraft sees linear Entertainment OI (Operating Income) dropping to $3.3 billion in F2024 and further down to $2.0 billion in F2026. At the same time, DTC OI will rise from -$475 million to +$3.5 billion. “Thus,” says Kraft, “the total Entertainment pie grows for Disney and makes the linear decline very manageable.”
All of this is being facilitated by the success Disney has had in scaling Disney+/Hulu/Star, while boasting 113 million core Disney+ subscribers, 49 million Hulu subscribers, and the prospect of $24 billion in F2024E DTC revenue.
Showing the potential here, it’s worth noting that in 2020, Netflix had similar revenues of $25 billion while delivering an 18% OI margin. Furthermore, Hulu’s and Disney+’s aggregated share of US TV Screen Time is behind only Netflix and YouTube and demonstrates “scale in its share of viewing.”
Bottom-line, Kraft reiterated a Buy rating on DIS shares along with a $115 price target, which implies ~22% upside from current levels. (To watch Kraft’s track record, click here)
The Majority of the Street back Kraft’s prognosis. Based on 19 Buys, 6 Holds and 1 Sell, DIS has a Moderate Buy consensus rating. At $107.23, the stock forecast could provide investors with 14% gains over the next 12 months. (See Disney stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
