Disney’s Streaming Momentum Signals Potential for Stock Surge

Disney (NYSE:DIS) has been making significant progress in its streaming business lately. Although Netflix (NASDAQ:NFLX) continues to lead the industry with a stock increase of over 85% this year and a market cap exceeding $380 billion—twice Disney’s $200 billion—Disney is quietly building strength in this competitive space. The company’s direct-to-consumer (DTC) operations generated nearly $23 billion in revenue for the fiscal year ending September 2024, while Netflix is anticipated to report about $39 billion for the same period. With over 175 million subscribers compared to Netflix’s 283 million, Disney’s streaming division is inching closer to sustained profitability. This could point to an undervalued status for Disney in light of its streaming success. Will streaming propel Disney stock to double in the coming years? It’s a strong possibility.

In FY’24, Disney’s streaming revenues rose by approximately 14% year-over-year, reaching about $23 billion. If this trend continues with a growth rate of around 12% annually over the next two fiscal years, revenue could hit $28.6 billion by FY’26. Additionally, improving operating margins for streaming from around 5% to 25% could yield operating earnings of about $7.1 billion. Given that Netflix operates with margins around 30%, it seems feasible for Disney to make similar advancements as they are still in the early stages of monetization. Currently, Netflix trades at a valuation multiple of about 39x its estimated 2024 operating income. If investors were to value Disney’s streaming segment at approximately 30x operating earnings, this could result in an enterprise value of around $210 billion for Disney’s streaming operations alone.

This figure is close to Disney’s current market cap, indicating that there is much more at stake, including the company’s theme parks, television, and sports entertainment, which collectively brought in $67 billion in revenue last fiscal year. Adding these other segments into consideration illustrates how Disney stock could effectively double from its current position. Below, we assess the performance of Disney’s streaming service in comparison to Netflix’s.

Historically, DIS stock has faced challenges in recent years, underperforming against broader market trends. The stock delivered returns of -15% in 2021, -44% in 2022, and a modest 4% in 2023. Conversely, the Trefis High Quality (HQ) Portfolio, composed of 30 stocks, has consistently outperformed the S&P 500 during the same period. Why is this? HQ Portfolio stocks have offered better returns with reduced risk compared to the benchmark index, avoiding the volatility that often plagues individual stocks.

Subscriber Growth and Price Increases Boost Profitability

Disney has heavily invested in its streaming services in recent years, and these efforts are starting to yield results. In the last quarter, the direct-to-consumer segment generated $5.8 billion in revenue—a 15% year-over-year increase—while operating profits climbed to $321 million, a significant turnaround from a loss of $387 million during the previous year. Disney+ added 4.4 million core subscribers last quarter (excluding the lower-priced Disney+ Hotstar service in India), leading to a total of approximately 123 million Disney+ subscribers, reflecting a 9% increase from last year. Hulu now boasts close to 52 million subscribers, a 7% rise year-over-year. Along with subscriber growth, Disney’s recent price hikes have contributed to revenue enhancements. For example, the ad-free Disney+ plan saw a $2 increase to $16 in October, following a similar price adjustment in 2023.

The ad-supported tier of Disney+ is also thriving. About half of U.S. Disney+ subscribers now choose the ad-supported version, a result of a strategy to encourage users into these plans by raising costs for ad-free options. This shift could be quite profitable as the streaming industry moves increasingly towards ad-supported tiers, boosting revenue from both subscriptions and advertisements. Disney’s ability to precisely target users with its high-quality family-oriented content can also positively influence ad rates.

While Netflix still leads the streaming race with 283 million subscribers—reporting a 14% year-over-year growth attributed to combatting account sharing and its advertising efforts—Disney trails with around 175 million subscribers growing at a slower 8%. Netflix’s average revenue per user (ARPU) is also higher at $11.60 globally, compared to Disney+’s $7.30, although Hulu shines with a better ARPU of about $12.50. While Disney stock might appear undervalued, there are concerns regarding the risk associated with Netflix at the lofty price point of $900.

Potential for Higher Valuation of Disney Stock

Despite Netflix’s current growth advantage, Disney’s extensive intellectual property—encompassing iconic franchises like Marvel, Star Wars, and legacy animation—brings considerable potential for future success. To narrow the valuation gap with Netflix, Disney needs to enhance both its streaming margins and subscriber growth. Fortunately, the company is actively pursuing opportunities such as a paid sharing feature introduced in the U.S. this September, allowing users to add members outside their household for an extra fee starting at $7 per month. This follows Netflix’s successful rollout of a similar option earlier this year. Should Disney mirror Netflix’s growth, it might continue to gain traction.

On the margin improvement front, Disney’s marketing expenditures for streaming are steadily decreasing as the service matures, and bundled offerings are keeping customer retention high. By providing a package for Disney+, Hulu, and ESPN+ at $17 per month, Disney has created a more appealing option that enhances user loyalty and reduces churn. Furthermore, given Disney’s extensive entertainment ecosystem, content investments provide significant lifetime value. Unlike Netflix, whose revenues primarily come from monthly subscriptions, Disney can capitalize on its theatrical releases, theme parks, merchandise, and licensing, making its content investment more resistant to the challenges faced by standalone streaming services.

We estimate the value of Disney stock at $130 per share. For a deeper analysis of Disney’s valuation, refer to our report, which outlines factors influencing our current price estimate. Additionally, our exploration of Disney revenue provides insight into the company’s key revenue sources and their trends.

[1] Returns as of 11/28/2024
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.