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JP Morgan says Disney+ Streaming Will Challenge Netflix: Buy DIS Stock?

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Disney (DIS - Free Report) shares have lagged the market so far this year, but have trended in the right direction as the entertainment power prepares to launch its streaming service in late 2019. Now, analysts at JP Morgan (JPM - Free Report) predict that Disney+ will see its subscriber base eventually challenge Netflix (NFLX - Free Report) .  

JP Morgan Note

Disney’s brands and massive infrastructure are poised to help the company’s soon-to-be-launched stand-alone streaming service become hugely popular, according to JP Morgan analysts. The company is set to debut Disney+ later this year. The service will feature an array of new original Disney, Pixar, Marvel, Star Wars, and National Geographic content. Disney also said the new streaming platform will include “unprecedented access” to Disney’s library of film and television offerings.

The entertainment conglomerate’s streaming service is projected to eventually boast 160 million subscribers worldwide, according to JP Morgan analyst Alexia Quadrani. “While there is little question there are more direct-to-consumer services today than ultimately should survive, we have no doubt that Disney+ remains on the short list of products that should prevail longer-term,” Quadrani wrote in a note.

“Our confidence in the resilient success of Disney+ comes from the company's unmatched brand recognition, extensive premium content, and unparalleled ecosystem to market the service.”

Netflix closed the fourth quarter with 139.3 million paying memberships and expects to add 8.9 million subscribers in Q1 2019 to reach 148.16 million. The current king of streaming clearly has a massive head start and expects to expand for years, which means Netflix will likely be far larger than Disney+ if and when it ever hits 160 million subscribers.

Still, the JP Morgan analyst understands that the larger streaming market is set to become even more competitive and lucrative as the likes of Apple (AAPL - Free Report) , AT&T (T - Free Report) , and NBC Universal (CMCSA - Free Report) , look to challenge Amazon (AMZN - Free Report) Prime and Netflix. With that said, Disney has set itself up for success based on price and content. “Disney has already shown some disposition to forego short-term revenues in order to develop the streaming business, by pulling content from Netflix once its contract expires at the end of the calendar 2018 film slate,” the JP Morgan analyst continued.

 

 

Outlook

Disney has yet to officially unveil many details about its new streaming offering, aside from a few of the original shows. Executives have said that Disney+ will cost less than Netflix—its premium plan costs $15.99 a month—because they want the service to reflect its smaller catalog. Investors should note that Disney is ready to detail and demonstrate Disney+ at its investor day in April and also provide insights into its larger direct-to-consumer push.

Disney already successfully launched ESPN+ in April 2018 at a $4.99 per month price point. The service, which doesn’t feature any of ESPN’s main offerings, has already hit 2 million paid subscribers. Disney’s $71 billion deal to acquire major 21st Century Fox assets is also nearing completion. This will not only bolster its box office business, but eventually help Disney offer an even more attractive streaming service.

Looking ahead, our Zacks Consensus Estimate calls for Disney’s current quarter revenues to slip 0.73% to $14.44 billion. Meanwhile, Disney’s full-year revenues are projected to climb 1.76%. Jumping a bit further ahead, DIS’ fiscal 2020 revenues are expected to climb 5.1% higher than our 2019 projection.

At the bottom end of the income statement, the company’s outlook does not appear very strong as it continues to spend heavily on its streaming future. The firm’s adjusted 2019 earnings are projected to come in nearly flat, with 2020 expected to pop 2% above our current-year estimate.  

Bottom Line

Disney is a powerhouse that will likely help shape the entertainment industry for years to come. The company’s family films and action movies have come to dominate the box office, and it has expanded its theme park and resort footprint. And of course, it is set for a successful streaming future, bolstered by its Fox deal, and looks poised to be a major player in live sports—which will only become more attractive to advertisers as non-ad supported platforms proliferate.

Disney is also a dividend payer, with a yield of 1.54%, that is trading at 15.9X forward 12-month Zacks Consensus EPS estimates. This represents a discount compared to its industry’s 18.8X average, the S&P’s 16.6X, its own five-year high of 22X, and its five-year median of 17X. This means that Disney’s valuation is hardly stretched at the moment.

Disney stock hovered at roughly $114 a share through morning trading Wednesday, which marked a 5% downturn from its 52-week high. Disney currently sports a Zacks Rank #3 (Hold) and is certainly a stock to consider based on its long-term growth plans.

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