Why Disney Will Be Valued Like Netflix

Walt Disney Co.'s (DIS) streaming entertainment business – fueled by the magical box office results of Avengers – is on track to dramatically transform Disney's long-term growth. This could warrant it the same valuation of Netflix Inc. (NFLX), according to a study by Macquarie Research outlined by Barron's.

Why Disney Looks Attractive

• Shares of the legacy entertainment company up 22% YTD vs. S&P 500’s 16.6% return
• Avengers: Endgame on track to become the highest grossing box office film ever, opening weekend rakes in $1.2 billion
• Content slate includes at least five Marvel films through 2021, new X-Men film, new installments for the Frozen and Toy Story franchises, remake of The Lion King
• Streaming service Disney+ to launch in November

Source: WSJ

Disney's shares have already surged more than 22% this year, almost double the broader S&P 500’s rally. The stock reached new record highs this week on the back of the sweeping success of the Avengers: Endgame opening weekend, with box office sales at a whopping $1.2 billion. While individual movies rarely move markets, given box-office gross is a small fraction of a conglomerate like Disney’s total revenue, the amount by which sales exceeded expectations caused a handful of analysts to up their stock price targets and earnings estimates, as outlined by The Wall Street Journal.

Looking forward, Disney has no shortage of content and plenty of Marvel films lined up, including at least five untitled ones expected to release through 2021, per Barron's. Additionally, this weekend's box office debut included a trailer showing a new X-Men film, while new installments are expected for the popular Frozen and Toy Story franchises, and a remake of The Lion King. The company is also reportedly preparing to massively expand its parks at Disneyland in California and Disney World in Florida within the next few months with a Star Wars themed section.

Now, Macquarie’s new price target for the company, at $165 a share, up from $125 per share, implies a near 22% upside from Thursday close and works out to about seven times estimated 2024 sales. That's “the same multiple [Netflix] traded at when it reached 90m subs and similar to [Netflix] current EV/sales multiple of 6.5x 2020,” wrote Macquarie analyst Tim Nollen. EV refers to enterprise value, or the market capitalization of a company plus the cost of its debt and net of cash. He decided against using earnings estimates to value the company, given they have been "muddled" by the recent acquisition of 21st Century Fox assets and the cost of launching Disney+.

The upbeat forecast assumes the success of Disney+, which is aiming to start generating major profits within a few years. This should be a major challenge for Disney as it starts it streaming service from the ground up and heads off against established players like global leader Netflix and Hulu, as well as deep-pocketed tech giants Amazon.com Inc. (AMZN) and Apple Inc. (AAPL), which are pouring money into content wars. Disney expects its investment in content to exceed subscription revenues until 2024, which should weigh down overall earnings in the coming years.

Looking Ahead

While the future of Disney’s streaming service, priced below Netflix, remains up in the air, the company has at least succeeded in proving that it can remain a force as a legacy player in a disrupted market. Investors will be keeping an eye on how Endgame does in its second weekend, potentially shedding light on the future successes of Disney’s slew of upcoming films.