Walt Disney's (DIS +0.92%) stock price is down about 18% since November, when it reported that Disney+ added only 2.1 million subscribers in the September-ending quarter. That was below analysts' estimates, and the recent downturn across the broader market to start the year has only compounded the negative sentiment surrounding Disney. But concerns over Disney+'s subscriber growth should no longer matter.
It's all relative to value. At the current share price of around $140 at the time of writing, the Disney+ premium has vanished. The present stock price merely puts a fair value on Disney's media networks, theme parks, and consumer products. Investors who buy the stock today are basically getting Disney's future streaming growth for free. Here's why.
Image source: Walt Disney.
Investors are placing little value on Disney+
Disney+ was officially unveiled in April 2019. Even after the post-announcement pop, Disney's share price ended the month of April trading at a modest price-to-earnings (P/E) ratio of 15.4. Given Disney's top entertainment and media brands, a rational investor could have easily made the case that the company was undervalued and deserved to trade at 20 times earnings, which is where it traded up to 2017.
DIS PE Ratio data by YCharts.
It's gotten more difficult to value Disney's business using simple valuation tools like the P/E multiple. Streaming content is expensive. Disney has guided it will spend between $8 billion to $9 billion annually starting in fiscal 2024 to produce original content. The content spending so far has wiped out Disney's earnings, which has inflated its P/E to an expensive-looking 132.
This doesn't mean Disney is overvalued. We need to assess what Disney+ could be worth down the road and compare that to what Disney's whole business is trading for today.
At the current quote, it's almost as if Disney never launched Disney+. The recent sell-off brings Disney's market capitalization (total shares outstanding times the stock price) to $262 billion -- within the same market cap range in 2019. Again, the current market cap could represent a fair valuation for Disney before it entered streaming and started spending all its profits on original content.
DIS Market Cap data by YCharts.
Investors are concerned that Disney+ is going to fall short of management's fiscal 2024 guidance to reach between 230 million to 260 million subscribers. It had 118 million as of Oct. 2.
However, even if Disney falls well short and reaches only 200 million subscribers in three years, there's still a good return opportunity here.
With 200 million subs paying $8 per month, Disney+ would bring in $19.2 billion in annual revenue. Applying Netflix's recent price-to-sales ratio of 7 would put the value of Disney+ at $133 billion. That amounts to half of Disney's current market cap.
Disney could be worth even more
Disney is just getting started unleashing new originals from Star Wars, Marvel, and Pixar on streaming, so Disney+'s subscriber growth can reaccelerate. Over the last decade, Netflix has raised its subscription fee several times, which is another catalyst for Disney+. If Disney reaches its subscriber guidance and/or raises the monthly fee, Disney+ would be worth considerably more than the $133 billion estimate above.
For example, 245 million subscribers paying $12 per month would translate into $35 billion in annual revenue. At a P/S multiple of 7, Disney+ would be worth $245 billion, or almost as much as Disney's whole business is selling for now.
Keep in mind, we're not even talking about the value of Hulu and ESPN+, which had a combined 61 million subscribers as of Oct. 2. Taking all this into account, a double from today's share price within the next five years is not out of the question for Disney investors.
