Disney's media business has surpassed 100 million subscriptions! How much room is there for stock prices to rise in the next three years?

Although market sentiment remains sluggish, Disney's basic business model remains stable and continues to attract consumers with parks, streaming services, and sports programs.

Disney+, Hulu, and ESPN's diverse streaming product portfolio forms the best streaming service package with a strong competitive advantage.

Management's massive investment in the experience department shows their confidence in the company's future growth and stability.

Current pricing indicates a positive risk-reward ratio with a significant margin of safety. Even under some negative scenarios, there is still potential room for growth.

Market sentiment at Disney (NYSE: DIS) can be said to have reached an all-time low, and many long-term investors have lost confidence in the company. This is mainly due to factors such as management issues, pressure from aggressive investors, weak consumer demand, and a decline in linear TV. The problem is, I haven't seen these factors substantially affect Disney's basic business model. Consumers are still keen to visit Disneyland, continue to subscribe to Hulu and Disney+, and use the ESPN platform.

Through my in-depth research on the company, I believe Disney's core business remains strong. The only thing affecting stock prices is short-term market noise and uncertainty about the future. The current price of $101 per share reflects market concerns that the linear TV business is declining faster than the streaming business, that Park's growth may be stagnating, and that intellectual property is not contributing enough to the company's overall stability.

However, the probability of these situations occurring simultaneously is very low. Precisely because market expectations are so low, Disney is expected to perform well over the next three years, and there are many potential benefits. My price target for Disney is $138, which is based on 2026 $19,057 million in revenue and a 15x price-earnings ratio.

In this article, I'll give a brief overview of Disney's current business model and financial situation. Next, I'll analyze why current market expectations underestimate Disney's chances of success and ignore the clear evidence that its streaming and amusement business has been generating cash flow over the long term. Finally, I'll discuss some potential catalysts that may drive Disney's excellent performance, and summarize the full article by showing my valuation method and possible risks.

Disney currently operates through three main divisions: Entertainment, which mainly covers non-sports TV shows, streaming services (directly to consumers), and movies; Sports, which mainly includes ESPN; and Experiences, which cover theme parks, resorts, and cruises.

Recent departmental adjustments have made ESPN (Sports) a separate category, reflecting management's confidence in this field.

Additionally, the entertainment sector continues to perform strongly, and the combination of Disney+ and Hulu provides consumers with significant streaming services. In the experience sector, although management anticipated a slowdown in growth, the division was still generating strong revenue for the company. At the same time, this departmental adjustment made long-term comparisons of Disney's financial situation more complicated. The constant changes in certain financial data and reporting metrics have also made it more difficult to value a company.

Despite poor market sentiment, Disney's financial situation remains strong. In a recent Q2 2024 earnings call, the company announced that its streaming business was profitable for the first time, its first share repurchase in six years, and is expected to generate more than $8 billion in free cash flow in 2024. Despite the negative impact of the Federal Reserve's rate hike cycle on consumer spending, Disney has achieved strong financial improvements over the past three years.

The Experience Division, which mainly includes Paradise, has rebounded to 28% in 2023, an increase of nearly 3% over 2019. Furthermore, despite the decline in the linear TV business, the entertainment sector achieved a compound annual growth rate of 5.5% from 2021 to 2023.

In November 2019, Disney announced the launch of Disney+, which was an unexpected success. By the second quarter of 2021, the number of subscribers exceeded 100 million.

It can be seen that the stock price rose in early 2021, but as growth slowed, the stock price fell back to $80 in 2023 and picked up at the beginning of this year.

Recently, although Disney's streaming business was profitable in the first quarter, the stock price fell due to anticipated losses in the third quarter and stagnant subscriber growth. This shows that the market has a huge impact on short-term expectations for the streaming business. Over the long term, Disney has now demonstrated the profitability of streaming media, and its revenue and operating profit are still growing faster than the loss of the linear TV business.

Additionally, Disney+ and Hulu continue to increase the number of subscribers, and future password sharing programs will further support this growth. Here's the transition between DTC and linear TV.

I've also provided the number of Disney+ and Hulu subscribers and ARPU (average revenue per user). In the chart, Disney's metrics are on the left and Hulu is on the right. Despite Disney+'s cricket copyright issues in early 2023, their number of subscribers has grown 18% since the first quarter of 2022, while Hulu has grown 11%.

From an ARPU perspective, Hulu's performance is relatively stable, with an SVOD (streaming only) package of $11.84 per month and a live TV + SVOD package of $95.01. The SVOD package alone accounts for 45.8 million of a total of 50.3 million subscribers.

Disney's ARPU, on the other hand, has grown significantly, with the composite figure growing from $4.41 to $5.65 since the first quarter of 2022. This is a significant increase considering they have over 150 million subscribers. In comparison, Netflix (NFLX) has a global ARPU of $11.92 and 285 million subscribers. This provides a great contrast to Disney+'s long-term revenue potential. (ARPU refers to average revenue per user, calculated on a monthly basis)

Finally, considering DTC accounts for 25% of the company's total revenue and is one of the key value drivers, I built a historical revenue model. Below you can see continued growth in Hulu and Disney+ sales.

First, I don't think this growth will stop anytime soon. Disney+ is currently the second or third largest streaming service in the world, depending on how you calculate Amazon Prime (AMZN), while Hulu is ranked 8th. Second, Disney+ only launched in 2019, while Netflix launched in 2007, which shows Disney+'s potential for further growth.

Finally, it is clear that DTC revenue growth is increasing, while negative growth in the linear TV business is slowing down. More importantly, this doesn't include ESPN, which is probably the strongest reason to keep the linear TV option. This suggests that wire cutting may be much slower than expected, providing enough time for DTC to surpass and absorb future linear TV business losses.

The following analysis is speculative, as subscribers may cancel their streaming plans at any time, although this deviation is quite small compared to the reported numbers. The revenue calculation uses the average number of subscribers for the previous two quarters, multiplied by ARPU, then multiplied by three (12 months/4 quarters per year). Next, I examined the share of DTC and linear businesses in the company's total revenue. Looking at quarterly changes, linear business growth appears to be slowing, with growth of -1.23% in the most recent quarter, while DTC growth was +2.36%.

Although DTC streaming metrics remain a key performance driver for the company's stock performance, the Experience Division accounts for approximately 38% of consolidated revenue and 70% of operating revenue. Over time, investors expect this number to drop as DTC becomes profitable and ESPN releases its full streaming service. The first obvious point is that Disney dominates the theme park industry. Eight of the top ten theme parks in the world own Disney shares. Furthermore, its underlying brand name allows it to incorporate household names into all parks, thereby attracting a wider audience.

Simply put, Disneyland continues to innovate, launch new attractions and improve the visitor experience, thereby driving growth and increased visitor numbers. Below, you can see the financial breakdown of revenue and EBITDA for the Experience Division, highlighting clear and consistent financial stability.

Next, let's explore some of the questions investors are asking. On the second-quarter earnings call, management said the experience sector's growth may slow due to the end of the retaliatory travel wave. This is indeed a factor, but the bigger problem is that most consumers are not doing well financially. High interest rates make it difficult for businesses to provide affordable goods and services. While this is an issue to be concerned about, I don't think it will have a significant impact on Disneyland's long-term performance.

As shown in the image above, the Experience Division (almost all of it is Paradise) continues to generate a steady cash flow for the company.

At the end of the day, while it's impossible to predict a recession or changes in consumer spending, we can reasonably assume that consumers will continue to visit Disneyland. According to various forecasts, the global theme park industry will grow at a compound annual rate of 4% to 7% over the next ten years. Given Disney's huge market share, these predictions are clearly reasonable and support its continued cash flow generation.

I think the most important issue is the high operating costs and capital expenses of Disney theme parks. Over the past 14 quarters, Disney's average quarterly capital expenditure on park investments was close to $1.2 billion. Management also plans to double that number within the next ten years. Although some investors might see this as negative, it shows management's confidence in the department. If they think there's a potential problem, they won't increase their investment. On the contrary, it shows that Disneyland will continue to be the most innovative and engaging choice.

So what's driving this change? I think current market expectations focus more on achieving goals than exceeding expectations. Looking back at the foregoing, investors seem to have overestimated the probability of failure in each sector. Although it is not possible to directly calculate specific values, based on financial performance and investor metrics, I think the DTC department has the greatest impact, followed by the experience department, and finally sports and basic content.

Going forward, the DTC department's main catalyst will be the upcoming crackdown on password sharing to be implemented in the coming months. Netflix reports that profits have increased significantly since implementing the measure in May 2023. Additionally, each quarter provides key data on subscriber growth and ARPU. Upcoming TV series and movies will also have an important impact on this data.

In terms of parks, Disney will continue to expand, particularly through its five-year construction plan and an investment of around $60 billion over the next ten years. In terms of content, “Deadpool 3” and “Mind Force 2” will be screened in the next few months. Finally, ESPN still plans to launch a full streaming service in 2025, with all ESPN channels including the NFL, NBA, and college sports. In the long run, if these catalysts work as expected, we can expect to see a significant rise in stock prices.

Finally, let's explore the valuation of Disney stock. First, we need to understand the company's market positioning. Objectively speaking, I don't think Disney has any obvious rivals. Its unique division of business segments makes it necessary to use historical valuation multiples and key performance indicators when analyzing the company. Some might think Comcast (CMCSA) is a good comparison, but there are actually many differences in the business models of the two.

Starting with historical valuation multiples, we can check out Seeking Alpha's valuation section to understand Disney's current deal situation. Basically, the “F” rating does not provide meaningful comparability because it is based on the communications services industry. Further analysis revealed that Disney's transaction price was actually significantly lower than its average for the past five years.

The only problem is that these numbers were affected by Disneyland's almost zero profit in 2020 and 2021. To fix this, I removed the data from Q3 2020 to Q1 2022 in the image below. Note that Disney's fiscal year ends in October of each year.

Although the early 2022 data may still include outliers, judging by valuation multiples, Disney's stock currently appears very attractive. EV/EBITDA and EV/EBIT are currently at their lowest levels since the first quarter of 2019, while EV/sales are at an all-time low. Specifically, the current EV/EBITDA is 12.8 times, EV/EBIT is 21.3 times, and EV/sales are 2.6 times. More importantly, it shows that investors have been willing to pay a premium for Disney for the past five years.

Now let's further analyze the financial data for the next ten quarters. Current expectations show operating revenue of $18.546 billion in 2026, which means a reasonable valuation multiple of the current share price is 12 times. Below, I've summarized the results of my analysis, and based on 2026 operating revenue of $19.057 billion and a price-earnings ratio of 15 times, I came up with a share price of $138.

Starting with my sensitivity analysis, even assuming Disney's transaction multiplier drops to 13 times and revenue expectations are reduced by about $250 million, this still means nearly 10% room for growth. More broadly, my consolidated financial data showed a compound annual growth rate (CAGR) of revenue of only 3.15%, which is lower than expected by more than 1.5%. Furthermore, my operating margin was only 0.8% higher than expected. Both predictions have a high probability of success. This model also assumes a conservative increase in net users and ARPU growth, and these numbers are likely to be even higher if password sharing crackdowns are implemented.

For the experience division, revenue is expected to grow at a rate of 4%-5%, with an operating margin of 27%. This basically assumes that revenue growth is stable, in line with management's expectations, and operating profit margins tend to be at the recent average. By category, this even includes the Experience Division's revenue accounting for only 53% of total revenue in 2026, indicating that as Disney achieves its goals, the company's business will become more diversified.

This valuation shows the current share price and has taken the worst-case scenario into account. For example, assuming the experience department grows at minus 2% and profit margins fall to 20%, this model still shows room for growth of 8%. Similarly, even if the valuation multiplier is 13x, there is still a 15% upside potential. This shows that Disney has a high margin of safety, and it is likely to rise even under negative circumstances. In this context, we can see through the BiyaPay App, a multi-asset transaction wallet, that its current valuation is acceptable. Users who want to enter can directly trade online in real-time on BiyaPay, or deposit digital currency (USDT) to BiyaPay, and then withdraw fiat money to invest in other securities.

Overall, my model assumptions remain conservative and are generally in line with current expectations. I believe that if Disney can meet its goals in terms of streaming business, linear TV stability, and continued park growth, investors could value the company at 15 times the revenue.

To maintain transparency, my model can still be adjusted to speculate on further downside risks. Other investors may use different methods or multiples to value Disney. Either way, Disney's potential problems are still big because their products and services are largely dependent on consumer discretionary spending. I expect the short-term problems to continue until the Federal Reserve starts cutting interest rates, which I hope will happen by the end of 2024.

Specifically, the DTC division's KPIs are still Disney's weak link. Any decline in the number of subscribers, ARPU, or negative guidance on related metrics will cause significant negative reactions in stock prices.

Additionally, thread cutting may occur sooner than expected, leading to a sudden drop in revenue. In terms of experience, Disneyland is still more expensive for the average consumer. If Disney doesn't respond properly, it could lead to a drop in the number of visitors. Currently, the problem is still minor and has not been revealed in the financial report.

Finally, the sports sector and content generation are also critical parts of Disney's business model. This means that the success of ESPN's complete DTC platform and continued content creation are critical to overall performance.

In brief, Disney's operating cash flow has recovered and is expected to surpass 2018 levels. The DTC division (Hulu and Disney+) continues to excel in subscriber growth and ARPU, which translates into continued revenue growth. DTC is growing significantly faster than the linear TV business declining.

Finally, Disney's Experience Division performed well after 2020 and remained a leader in the field. All of this is supported by intellectual property owned by Disney and has attracted a broad consumer base.

Disney remains an attractive long-term investment with multiple paths to growth and stability. The current $101 share price means that the market expects all departments of the company to miss their goals in the next few years. If Disney continues to grow at a moderate rate, as shown in the model above, this will offer significant upside potential. Additionally, Disney+, Hulu, and ESPN's DTC plan attracted a wide audience, forming the perfect streaming mix. The park also continued to perform strongly, and even in the face of potential losses, Disney's diversified business was able to respond flexibly.

This analysis clearly shows the positive risk-reward ratio offered by Disney Investments, so I not only own Disney now, but will continue to do so in the future.