2021 was a rough year for Disney (DIS -0.18%).
The entertainment giant's stock is down 15% year to date, badly trailing the S&P 500's gain of 26%. A slowdown in growth at Disney+ and the resurgence of the delta coronavirus variant helped torch what had looked like a promising year for the family entertainment company.
Disney may be down at this point, but it would be a mistake to count it out. A number of catalysts could drive the stock higher in 2022, including a COVID recovery, though the omicron variant seems to be spoiling that hope for now.
The stock touched an all-time high of $203.02 back in March. At this point, getting back to $200 per share next year would represent a gain of 30%, a significant one-year rally for a blue-chip stock. Let's take a look at a few of the reasons it could hit $200 and why it might not.
Image source: Disney.
Next stop: $200?
Disney shares tumbled after its fiscal 2021 fourth-quarter earnings report in November as the company missed top- and bottom-line estimates and added just 2.1 million Disney+ subscribers, showing the blistering growth the streaming service experienced early in the pandemic has faded.
However, Disney+ subscriber growth could pick up next year as the upcoming content slate looks stacked. Among the expected releases are several Star Wars and Marvel-themed shows, including The Book of Boba Fett, Obi-Wan Kenobi, She-Hulk, and Ms. Marvel. Additionally, new animated content is coming to the platform, including The Ice Age Adventures of Buck Wild and a live-action remake of Pinocchio. Netflix has demonstrated the tight relationship between new content and subscriber growth, and that should ring true for Disney+ as well, especially since production efforts were set back by the pandemic, which also created an unexpected surge in demand.
Separately, 2022 should continue to mark a rebound for its theme parks, which are still performing below pre-pandemic levels. Assuming the omicron threat fades by the spring, theme park traffic should top that of 2021, especially as the U.S. just reopened international travel in November, and international visitors make up a significant portion of guests at Walt Disney World in Florida. Similarly, the three theme parks in Asia would benefit from an increase in vaccinations and an easing of the pandemic as regulations in China and Japan have been especially tight.
Finally, the stock seems priced for a comeback. Earnings should move higher as theme parks recover, and the growth of Disney+ should help the company earn a higher, Netflix-like multiple. Analysts are expecting $5.09 in earnings per share (EPS) from the company in fiscal 2023, valuing it at a forward price-to-earnings ratio of 30, which seems like a reasonable valuation for a company whose EPS was above $7 per share before the pandemic.
Why it might not
After an unbelievable run over the last two years that has seen the S&P 500 surge more than 45%, there are a number of signs the broad market has overextended itself, including the Federal Reserve's recent announcement that it expects to hike interest rates three times next year and taper its quantitative easing program, which has taken a toll on growth stocks in recent weeks.
While Disney isn't a growth stock in the traditional sense, its transition to a streaming-first business, away from its broadcast and cable core, means it's sacrificing short-term profits for long-term potential. Operating income from linear networks, which still totaled $8.4 billion last year, declined 11% and could continue to slide due to cord-cutting and pressure on TV advertising.
The challenge for Disney is to grow its streaming business while managing the decline in its traditional media empire, but the latter will still weigh on profit growth.
Additionally, the COVID situation is fluid, and an extended outbreak of omicron or another variant would impact the recovery of Disney's theme parks.
Will it see $200?
Like timing the market, predicting one year's stock gains is nearly impossible, but a number of positive catalysts are in place for Disney, including the expanding content slate for Disney+ and a likely recovery at its theme parks. As long as the company can manage the decline in linear networks effectively, there's a good chance it will outperform the market over the next five years, especially at its current valuation.
