When you invest in equity markets, it is advisable to hold stocks over a long period of time. The buy-and-hold strategy has created massive wealth for shareholders. It can be difficult, however, to identify stocks that will be successful over the long term.
With rapid disruption in technology and consumer preferences, companies that do not meet challenges are left behind. Billion-dollar giants such as Nokia and BlackBerry, for instance, have been decimated in the smartphone race. But there is one stock that continues to be a top performer and has crushed market returns over the past three decades. Disney (DIS -0.70%) is a household name, and the stock has gained a whopping 750% since March 2009. But what makes Disney an attractive bet in 2020?
Disney is a well-diversified media and entertainment conglomerate with a strong portfolio that includes radio stations, movie studios, TV channels, theme parks, and now online streaming. The company has continually expanded its offerings, growing via acquisitions and by entering new markets.
Disney+ will be critical
On Nov. 12, Disney launched its Disney+ streaming service. In direct competition with services including Netflix and Amazon Prime, some estimate that Disney+ has signed up 25 million subscribers. The Disney+ app has reportedly been downloaded 41 million times and reportedly generated sales of $97.2 million since launch.
Disney+ is available at a price of $6.99 per month, which is reasonable compared with the monthly subscription cost of Netflix, which starts at $8.99 per month. Netflix's premium plan is far higher at $15.99 per month. The monthly membership fee for Amazon Prime is $12.99; Prime is $119 per year.
According to a Digital TV Research report, as reported by The Hollywood Reporter, Disney+ will have about 100 million paying subscribers by the end of 2025. At $6.99 a month, that would work out to $8 billion in annual revenue.
To expand its reach in online streaming, Disney has taken control of Hulu, partly by acquiring 21st Century Fox. Though still unprofitable, Hulu had 28 million subscribers as of May 2019.
During the most recent Disney earnings call with analysts, CEO Robert Iger said, "Our acquisition of 21st Century Fox was largely driven by the value it brought to our overall [direct-to-consumer] strategy, adding a number of critical elements including control of Hulu, which opens numerous growth opportunities domestically and internationally. We also gained a large library of quality film and television content along with additional filmmaking capabilities and the industry's best TV production studios, great talent, great brands and franchises...."
Disney has invested heavily to gain traction in the high-growth streaming segment. One advantage that Disney has over competitors is its portfolio of beloved content. While Netflix and Apple's Apple TV+ have spent billions to produce original content, Disney already has the rights to several popular movie franchises including Star Wars and the Marvel Universe.
A look at growth and valuation
Disney is moving toward a PaaS (platform-as-a-service) business model. The Disney+ platform means the company generates subscription revenue instead of a licensing fee for its content.
Disney has increased sales from $55.1 billion in fiscal 2017 to $69.6 billion in 2019. According to Wall Street estimates, sales are expected to touch $92.1 billion in 2022, indicating a compound annual growth rate of 9.8%.
Due to its robust top-line growth, Disney stock is trading at an expensive multiple. While the stock's market-cap-to-sales ratio stands at a reasonable 3.3, its forward price-to-earnings multiple of 23.4 is high considering an estimated earnings decline in fiscal 2020.
Disney stock has a forward dividend yield of 1.22%, and with a payout ratio of 28%, it has room to increase dividend payments. In the past 12 months, the stock has returned 30% compared with S&P 500 returns of 26%.
Despite a high valuation, investors can look to add this media giant to their portfolio based on the tremendous scope of its streaming and acquisition strategy.