Walt Disney Co. is shaking up its business, putting more attention behind streaming, and that’s reason enough to like the stock, according to a Wells Fargo analyst.
As Disney
DIS,
+2.10%
prepares for its Thursday investor day, which is expected to bring ample announcements about the company’s streaming strategy, Wells Fargo’s Steven Cahall has turned bullish on Disney shares, raising his rating to overweight from equal weight.
Cahall expects that subscriber growth will replace earnings per share as the key metric Disney investors care about, as the company moves from a “growth at a reasonable price” stock selection to a full-on growth story.
“In other words, we think investors will soon be willing to pay a high multiple (in some cases on revenue or on subs) for a global streaming growth story,” he wrote. “So, if one is excited about the sub growth story then the stock price should take care of itself, in our view.”
Disney shares are up 1.6% in premarket trading Wednesday.
Cahall estimates that Disney currently has about 120 million global streaming subscribers, excluding Hulu, which it majority owns, and could double that total to more than 250 million by fiscal 2025. “Sub growth stories tend to generate high multiples given the potential global [total addressable market] still ahead in video streaming, and as a result we like the two- to three-year streaming catalyst path at Disney,” he wrote.
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Looking forward to the investor day, Cahall predicts that Disney will unveil a target to break even on streaming by fiscal 2026 as well as a plan for “case-by-case releases of tentpole films into theatrical versus streaming windows.” He also thinks the company may project “a lesser commitment to resume dividend payments at some non-committal future period, likely after initial content ramps for [general entertainment] streaming.”
Read: Warner Bros. streaming shake-up praised by some analysts, while others say it won’t work
He also likes the parks portion of Disney’s business, calling this the company’s “flywheel” despite the new focus on streaming. “We’ve traditionally been bulls on the incremental margins in this business and think pent-up demand and cost reduction means [estimated fiscal 2022 and 2023] revenue will be a record” while operating income could exceed fiscal 2019 levels.
Cahall upped his price target to $182 from $155.
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Disney shares have gained 6% so far this year, roughly even with gains for the Dow Jones Industrial Average
DJIA,
+0.47%.
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