After spending more than four years stuck in neutral, The Walt Disney Company (DIS -0.15%) has started off 2019 with a bang, with the stock increasing more than 26% so far this year. What's driving the gains? Investor enthusiasm has grown due to the combination of box-office gold, the debut of Star Wars: Galaxy's Edge, and the upcoming launch of the company's flagship streaming service, Disney+.
The massive potential offered by Disney's entry into the streaming space is what seems to have investors most excited -- and they're not the only ones. On Thursday, Morgan Stanley analyst Benjamin Swinburne released a bullish research note, raising Disney's price target to $160, up from $135, and nearly 18% above the stock's closing price on Wednesday. The analyst believes that Disney+ could be a much stronger catalyst than many investors understand.
Setting a low bar?
Swinburne suggests that demand for Disney's over-the-top services will be much stronger than initially anticipated, driving stronger earnings in future.
During an investor day presentation in April, Disney laid out detailed projections for Disney+, which is scheduled to launch on Nov. 12. The company priced its offering at $6.99 per month (or $69.99 per year), significantly undercutting the price of other popular streaming services.
For comparison, Netflix's (NFLX -1.12%) least expensive plan is $8.99 per month, while its most popular tier -- which offers streaming on two devices simultaneously -- comes in at $12.99. Amazon (AMZN 3.04%) Prime, which includes free two-day shipping and a host of other benefits including streaming video, costs customers $119 per year.
Disney forecast total streaming subscribers of 135 million by 2024 at the midpoint of its guidance, with Disney+ drawing between 60 million and 90 million. The company expects Hulu to attract between 40 million and 60 million, and ESPN+ to have 8 million to 12 million subscribers.
Swinburne believes Disney will command at least 130 million total subscribers by 2024, driven by several catalysts. Disney's global launch is kicking off more quickly than many expected, the library of content when it debuts is more robust than anticipated, and the company will be leveraging third parties to maximize subscriber adoption. This combination of factors will likely drive strong ongoing adoption.
A whole new world
Investors are potentially underestimating just how quickly Disney could become a major player in the streaming market, as the company will have numerous advantages that Netflix didn't have when it first launched its streaming service in 2007.
While Netflix initially staggered its entry into international markets over a period of six years (with Amazon close behind), Disney will be in most worldwide markets within two years of its launch. The service will be available in North America in November, while also rolling out in Western Europe and some countries in the Asia-Pacific region soon after. Eastern Europe, Latin America and more of Asia will follow within the coming year.
The marketplace for over-the-top services is much more mature than when streaming was first offered by Netflix about 12 years ago. Consumers weren't sure what to make of the technology when it first debuted in 2007, and the majority of the viewing public didn't yet know to access streaming video. At the time, only the most tech-savvy were able to navigate Netflix's early streaming service. Now, consumers are generally able to stream across a variety of connected TVs, Blu-ray players, dongles, smartphones, and other mobile devices. The service will also be available on both Roku TV and PlayStation PS4 at launch.
Finally, there's Disney's library of movies and television shows. The company has a treasure trove of beloved classic movies going back more than 80 years, which is bolstered by its ownership of Marvel, Pixar, and Lucasfilm. Programming from its cable and broadcast stations -- and programming from Disney's recent Fox acquisition, including hits like The Simpsons and shows from National Geographic -- will augment its already robust lineup.
What this means to Disney investors
Disney provided a particularly wide range for its projected subscriber base five years from now. Including contributions from Disney+, Hulu, and ESPN+, the company expects subscribers in a range of 108 million to 162 million. Even if the company only hits the midpoint of its initial expectations -- which isn't overly ambitious -- a subscriber count of 130 million could generate an additional $4.00 in earnings per share over the coming five years, according to Swinburne. Considering that Disney generated earnings per share of $7.08 for fiscal 2018, this represents a sizable increase in profitability.