Disney Stock Forecast: Can It Rebound To $170? (NYSE:DIS)

Elevator Pitch

I upgrade my investment rating for The Walt Disney Company (NYSE:DIS) from a Hold to a Buy. In my previous March 11, 2022 article for DIS, I touched on the company’s entry into the residential property space with its Storyliving by Disney community project. I turn my attention to Disney’s stock price outlook and forecast in this latest update.

I take the view that Disney’s stock price can rebound by +23% from current levels to reach my price target of $170, which is based on a reasonable 30 times forward P/E multiple applied to my estimated FY 2023 earnings per share for DIS. As such, Disney’s shares are rated as a Buy.

DIS Stock Key Metrics

I discussed Disney’s financial performance for the first quarter of fiscal 2022 (YE September 30) or the fourth quarter of calendar year 2021 in my prior article published on March 11, 2022. Specifically, I made reference to management’s comments at the recent Q1 FY 2022 results briefing, which suggested that the Disney Parks, Experiences and Products business segment’s operating profit for the recent quarter had come in higher than what it achieved prior to COVID-19. It is noteworthy that this good performance has been largely driven by an increase in its US parks’ per capita spending by over +40%, notwithstanding the fact that attendance figures are still below pre-COVID levels.

In other words, there could be further upside to the Disney Parks, Experiences and Products business’ revenue and earnings going forward, assuming a further improvement in attendance. As such, investors should track key metrics that help to provide an indication of the sustainability of the recovery of Disney’s parks business in the quarters ahead.

On March 18, 2022, Deutsche Bank (DB) published a research report (not publicly available) titled “Tracking Disney & Universal Parks Attendance” which relied on geolocation data to estimate the attendance figures at DIS’s key parks in the US. In the report, it is mentioned that Universal Orlando, Universal Studios and Disneyland “have recovered in attendance as compared with the comparable C2019 (calendar year 2019) periods.” The sell-side analysts from DB also indicate in their report that Disney World “is continuing to close the gap between current and pre-pandemic attendance counts.” Although Disney World’s estimated attendance is still below pre-COVID levels unlike the other three parks, Disney World’s attendance has still improved by +5% on a QTD (Quarter To Date) basis as compared to Q1 FY 2022 according to the Deutsche Bank report. These are positive signs for the Disney Parks, Experiences and Products business segment’s expected revenue growth in Q2 FY 2022 (Q1 2022 in calendar year terms) and subsequent quarters.

With respect to the future profitability outlook for the Disney Parks, Experiences and Products segment, there is also further upside to this business’ profit margins going forward. Disney’s CFO Christine McCarthy highlighted at the recent Morgan Stanley (MS) Technology, Media and Telecom Conference 2022 on March 7, 2022 that “I don’t think the best is over for parks” in terms of margin expansion, noting that the company’s cruise ship sub-segment (part of the Disney Parks, Experiences and Products segment) is still at a very early stage of recovery.

In summary, the key metrics for the company’s key Disney Parks, Experiences and Products business segment mentioned above point to a positive outlook for DIS in the quarters ahead.

What Is The Highest Disney Stock Has Ever Reached?

In view of the bright prospects for Disney’s parks business, it is worth looking at the company’s share price history to determine whether DIS’ shares could potentially revisit its historical high.

The highest price that Disney stock has ever reached is $203.02 on March 8, 2021 during intra-day trading. DIS closed at $138.72 as of March 28, 2022 is -32% below its all-time peak.

Disney’s shares haven’t done well in the past year as well. In the last year, DIS’ stock price corrected by -25.8%, and the S&P 500 was up by +18.7% during the same period.

In the subsequent section, I write about what could be the factors that drive a recovery in Disney’s stock price in the near future.

Is Disney Stock Expected To Rise Again?

I am of the view that Disney stock is expected to rise again for two key reasons.

Firstly, there is a good chance that Disney’s financial performance can beat market expectations in the quarters and years ahead.

In an earlier section of this article, I discussed why the company’s Disney Parks, Experiences and Products business’ revenue and profit margins are very likely to recover and grow going forward based on management’s views and geolocation data for its parks.

Similarly, DIS’ other key segment, the Direct-to-Consumer or DTC business, should also live up to the market’s expectations in the future. Disney reiterated at the Morgan Stanley Technology, Media and Telecom Conference 2022 on March 7, 2022 that it is “well suited to achieve the subscriber guidance as well as the profitability guidance” for its DTC business. DIS was referring to its guidance of having Disney+ becoming profitable and boasting 230-260 million subscribers (versus 129.8 million Disney+ subscribers as of December 31, 2021) by the end of FY 2024 that it provided at the company’s Investor Day on December 10, 2020.

A recent decision that DIS made about its Disney+ subscription plans should be a key factor in the company realizing (or even exceeding) its guidance for its DTC business segment, which brings me to my second reason for thinking that its shares will rise in the future.

Secondly, DIS announced on March 4, 2022 that Disney+ will “introduce an ad-supported subscription offering in late 2022” for the US and extend this to other foreign markets next year. In the press release, Disney emphasized that this new “ad-supported offering is viewed as a building block in the company’s path to achieving its long-term (Disney+ subscriber) target.”

In my opinion, the ad-supported subscription tier for Disney+ should be a success considering the needs of both subscribers and advertisers.

From the perspective of subscribers, cost becomes an important consideration now as consumers have a growing number of entertainment options that include a wide range of streaming services. Also, not all consumers prefer uninterrupted content and some might like to have breaks for certain shows. At the recent early-March Morgan Stanley conference, Disney revealed that its consumer surveys found that “some are actually more favorably disposed to services with ads than without ads” implying that there is untapped demand for this new ad-supported option.

Thinking from the angle of advertisers, Disney+ is differentiated from other competing streaming services given its focus on family entertainment. A March 17, 2020 article published on Variety suggests that half of “American households with children under 10” are Disney+ subscribers. As such, there should be no lack of advertisers eager to advertise on the Disney+ streaming service.

I assess Disney’s valuations in the next section.

Can Disney Stock Rebound To $170?

I derive a price target of $170 for Disney based on a 30 times forward P/E multiple applied to my estimated FY 2023 earnings per share for the stock at $5.65.

My assumptions are that the company’s top line expands by a +18% CAGR between FY 2021 and FY 2023, and its normalized net profit margin improves from the mid-single-digit percentage level to 11% during this forecast period. This takes into account my positive expectations for Disney’s parks and DTC businesses as I explained earlier.

The P/E multiple of 30 times is pegged to Disney’s forecasted normalized earnings per share CAGR of +29.5% (assuming fair valuation is a PEG ratio of 1) for the FY 2021-2026 period as per market consensus data sourced from S&P Capital IQ.

In summary, I think that Disney’s stock can rebound to $170 within a year, which will imply an upside of +23% as compared to its last traded stock price of $138.72 as of March 28, 2022.

Is DIS Stock A Buy, Sell, or Hold?

DIS stock is a Buy. My target price of $170 for Disney offers a +23% upside which is sufficient to warrant a Buy rating. I see revenue and earnings beats for the company in the quarters ahead as re-rating catalysts.