New Cruise Ships And Disney+ Innovations Set To Propel Growth Despite Cost Challenges

Key Takeaways

• Expansion in the Experiences segment and new broadcasting rights indicate avenues for significant revenue growth through diversified offerings and international expansions.
  
• Initiatives in streaming, including content diversification and direct-to-consumer revenue optimization strategies, aim to strengthen future profitability and subscriber base.
  
• Evolving strategies in content investment, theme park attendance, and Disney+ subscription models present diverse revenue and cost structure challenges alongside long-term growth opportunities.

Catalysts

Operates as an entertainment company worldwide.

• With three new cruise ships coming online within the next 18 months, increased capital investments into the Experiences business hint towards substantial growth opportunities in this segment. This is likely to increase revenue and operating income substantially as these assets start contributing to the business, despite short-term startup costs.
  
• The finalized NBA rights deal starting fiscal '26, including components like WNBA growth and securing international rights for the finals, points towards future revenue growth from both domestic and international broadcasting rights. This deal also sets the stage for incremental monetization opportunities in the early years of the contract.
  
• Disney+ is seeing a broadening of its product offering, including the addition of news, sports (ESPN), and international NBA rights. These enhancements support continued subscriber growth and pricing power, positively impacting future revenue growth and potentially improving net margins through increased average revenue per user (ARPU).
  
• The company's focus on cost management and efficiency improvements, as mentioned in their commitment to tightly managing costs and productivity initiatives, likely aims at improving net margins across various segments.
  
• The introduction of the Disney+ ad tier and the focus on password sharing initiatives indicate strategic moves to optimize direct-to-consumer (DTC) revenue streams, which are crucial for achieving the target of double-digit margins in the streaming business, reflecting positively on future profitability and cash flow generation.

Assumptions

• Analysts are assuming Walt Disney's revenue will grow by 4.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.3% today to 10.1% in 3 years time.
• Analysts expect earnings to reach $10.3 billion (and earnings per share of $5.7) by about November 2027, up from $4.8 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $8.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.4x on those 2027 earnings, down from 38.4x today. This future PE is greater than the current PE for the US Entertainment industry at 22.4x.
• Analysts expect the number of shares outstanding to decline by 0.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.88%, as per the Simply Wall St company report.

Risks

• Softening in the theme park attendance, due to stress on lower-income consumers and high-income consumers traveling internationally more, could lead to decreased revenues and impact operating income in the Experiences business.
  
• Increased content spending for sports, scripted TV, and movies may put pressure on the company’s cost structure, potentially impacting net margins despite the strategic importance of content investment.
  
• The gradual shift of subscribers to the ad-supported tier or bundled offerings of Disney+ may continue to affect Average Revenue Per User (ARPU), possibly impacting the streaming service's revenue growth trajectory.
  
• Implementation of password sharing initiatives and technology improvements to enhance user experience and engagement on Disney+ is crucial for reducing churn and increasing ARPU but introduces execution risk that could affect subscriber growth and profit margins.
  
• Investments in new cruise ships and other capital expenditures in the Experiences segment are expected to yield long-term growth, but associated startup costs may impact short-term free cash flow and operating income, with implications for overall financial performance in FY '25.

Valuation

• The analysts have a consensus price target of $110.67 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 $133.0, and the most bearish reporting a price target of just $63.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $101.6 billion, earnings will come to $10.3 billion, and it would be trading on a PE ratio of 24.4x, assuming you use a discount rate of 7.9%.
• Given the current share price of $100.99, the analyst's price target of $110.67 is 8.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.