Platform Enhancements And AI Initiatives Will Boost Streaming Profitability

Key Takeaways

• Platform enhancements and bundling efforts across Disney+, ESPN, and Hulu are expected to boost profitability, engagement, and subscriber growth.
  
• Cost-cutting and strategic investments in experiences and live sports aim to increase revenue, margins, and advertising income.
  
• Combined industry challenges, execution risks, and consumer behavior changes could affect Disney's growth across streaming, sports broadcasting, and theme park operations.

Catalysts

Operates as an entertainment company worldwide.

• The rollout of platform enhancements at Disney+, including paid sharing, improved personalization, ad-supported tiers, and AI initiatives, is expected to significantly boost streaming profitability and engagement, impacting revenue and margins.
  
• Growth in the Experiences business, with the launch of Disney Treasure and improved booking forecasts for the back half of the year, supports stronger revenue and profit forecasts.
  
• Cost-cutting initiatives and more efficient content budget management are expected to improve overall profitability, positively influencing net margins.
  
• The strategic focus on ESPN, including the ESPN Flagship launch and the expansion of live sports offerings, aims to capture new subscribers and drive advertising revenue.
  
• Bundling efforts with ESPN, Disney+, and Hulu, along with the launch of new theatrical releases and streaming content, are expected to drive subscriber growth and enhance revenue streams.

Walt Disney Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Walt Disney's revenue will grow by 4.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.1% today to 11.1% in 3 years time.
• Analysts expect earnings to reach $11.7 billion (and earnings per share of $6.61) by about March 2028, up from $5.6 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $12.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.5x on those 2028 earnings, down from 32.7x today. This future PE is lower than the current PE for the US Entertainment industry at 24.6x.
• Analysts expect the number of shares outstanding to decline by 0.84% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.6%, as per the Simply Wall St company report.

Walt Disney Future Earnings Per Share Growth

Risks

• Economic or industry conditions, including devastating wildfires in Southern California, could impact Disney's revenues from theme parks and business operations tied to the affected regions.
  
• Competition within the streaming sector and changes in consumer preferences, such as challenges with curating content or shifting preferences towards dynamic interfaces, could impact Disney's ability to grow subscribers, affecting revenue streams from Disney+ and Hulu.
  
• Execution risks associated with technological advancements for Disney+, such as managing password sharing or demonstrating tangible improvements within a set timeline, could lead to slower-than-expected subscriber growth and profitability.
  
• Market dynamics in sports broadcasting, including potential shifts in advertising revenues and maintaining profitability with high sports content acquisition costs like the NBA rights, represent ongoing pressures on Disney's EPSN-driven revenue and profits.
  
• Pressures from possible slowdowns in park bookings or changes in consumer spending behavior, compounded by macroeconomic factors, might affect forecasted growth and margins within the Parks and Experiences segment.

Valuation

• The analysts have a consensus price target of $126.296 for Walt Disney based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $147.0, and the most bearish reporting a price target of just $79.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $105.2 billion, earnings will come to $11.7 billion, and it would be trading on a PE ratio of 24.5x, assuming you use a discount rate of 8.6%.
• Given the current share price of $101.61, the analyst price target of $126.3 is 19.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.