Since unveiling streaming in 2019, Disney (DIS) has pursued the Netflix (NFLX) strategy and investors expected the stock would gain the associated market premium that Netflix has enjoyed. Instead, in the wake of Netflix's disappointing outlook for subscriber additions, Disney was dragged down to a 14-month low on guilt by association.
Naturally, Disney's stock was apt to see a sympathy move lower, and a more sober assessment of growth prospects for the industry are in order, underscored by the nine downgrades of Netflix on Friday. Still, the decline poses an opportunity to buy Disney's stock on weakness given that the discount from slowing subscriber growth is already baked in.
Wall Street had reassessed some of the growth prospects for the Disney+ streaming service after Disney"s own disappointing outlook last quarter. The digestion phase of a pull-in of users related to the pandemic is ongoing. Yet, with 118 million subscribers, Disney+ is still rolling out internationally, with plans for launches this year in 50 additional countries and another 50 planned for 2023. With the disappointment at Netflix, the Street has renewed concerns about Disney's 2024 subscriber goal of 230 to 260 million.
Disney's park business has yet to find its stride, still hobbled by the pandemic. International parks in Shanghai and Hong Kong have been significantly affected by recent Covid-related business interruptions. Also, cancellations of college sports playoffs have impacted ESPN. Of course, the box office has seen only a partial recovery. Theatrical releases will remain a question mark in upcoming quarters. Disney Cruise Line has seen an increase in bookings since they resumed sailing in July. The newest ship, Disney Wish, is slated to set sail in June -- hopefully well-timed with receding summer pandemic travel issues.
With Disney unable to operate on all cylinders, Wall Street's expectations are already low for Disney's outlook, reflected in the recent stock underperformance. This sets the shares up for a rebound when fears regarding Disney+ subscriber growth abate and Covid-affected business segments recover. With the most robust intellectual property in the entertainment business, Disney has yet to fully leverage brands across their multiple distribution platforms.
Investors can be confident that as competition intensifies in streaming, Disney will be a long-term winner due to the superior content created in their studios. Disney maintains pricing power in streaming, recently raising the price of a Hulu bundle, and there's likely room to increase Disney+ as more content is added in years to come. Although risk does remain that producing more content will push out the profitability timeline.
The stock trades with a relative high forward price-to-earnings of 33, because of losses in the streaming business expected through 2024. However, valuing the shares exclusively on a multiple of earnings misses the underlying value of the unprofitable streaming business. JPMorgan believes Wall Street is underestimating future profitability, and despite near-term inflation pressures, the firm expects Disney to emerge from Covid with more profit upside.
Disney's theme parks can spearhead a recovery with the celebration of Disney World's 50th anniversary. The pent-up demand can stretch well into the future, but will only be fully unleashed when the Covid risk is diminished. The stock is already discounting many uncertainties and now reflects much of the risk and limited potential business upside. Disney's share price recent move lower in sympathy with Netflix, along with continuing Covid concerns, offers an excellent opportunity to buy the top entertainment company at a discount.