Walt Disney (NYSE: ) stock broke out to new all-time highs this month following the unveiling of its new Disney+ streaming service. The streaming service was no secret, investors have known it was coming for months. But more than its initial top- and bottom-line impact, the most important thing about Disney+ is that it completely changes the bull narrative for DIS stock.
Once Disney+ launches, Disney immediately goes from a legacy media company with pressured growth and earnings to a next-generation streaming pioneer. There are still plenty of long-term risks to the Disney stock story, but Disney+ will likely make investors forget about the company’s problems for at least a few years.
What Investors Need to Know
As anticipated, Disney+ will be priced st just $6.99, a steep discount to the standard Netflix (NASDAQ: ) plan at $12.99. Disney also has an impressive library of content. In addition to its classic movies, Disney has all the “Star Wars” movies following its acquisition of Lucas Films. It will also soon have the Fox (NASDAQ: (NASDAQ: FOXA) movie and TV content as well, including movies such as “Avatar” and “X-Men” and TV shows like “The Simpsons” and “Empire.”
Disney+ initially will offer 10 original movies and 25 original TV shows. Disney also said several key titles will launch and/or stream exclusively on Disney+. These titles include “Captain Marvel,” “Star Wars: Episode IX” and “Toy Story 4.”
Not surprisingly, Disney appears to be targeting users with an affordable, family-friendly alternative to Netflix.
DIS stock jumped more than 12% after Disney+ was unveiled at the company’s analyst meeting. Unfortunately, with the Disney+ launch scheduled for November, it will be a long time before the streaming service will have a positive impact on Disney’s numbers.
Disney said it is committing $1 billion in spending to Disney+ this year and another $1 billion next year. Bank of America analyst Jessica Ehrlich estimates Disney will dilute its EPS by between $3.5 billion and $4 billion over the next two years thanks to its streaming investments. Disney said it expects to reach a break-even point on streaming in fiscal 2024.
On the surface, these huge new investments eating into earnings are potentially troubling. A company betting its future on a new, untested service is also potentially concerning. Yet DIS stock is soaring, and there’s good reason why.
Growth at All Costs
Throughout the 10-year bull market, growth stocks have ruled. Value stocks have been shunned as investors clamor for the next big disruption story. Stocks trading with earnings multiples in the single digits lag the market.
Stocks with heavy earnings losses and negative free cash flow get a free pass as long as they are growing revenue, subscribers, users or whatever crazy growth metric the market is obsessing over.
It doesn’t seem to matter these days how terrible your financials are if you can tell a convincing story about what the world will be like four or five years down the road. Uber and Lyft (NASDAQ: ) are perfect examples of companies with great stories and no clearly viable business models.
Netflix is the quintessential example of this market mentality. In the most recent quarter, Netflix reported profit margins of just 7.6%, down 2.9% from a year ago despite raising subscription prices. Yet revenue was up 22.1%, and the company added 9.6 million global subscribers.
NFLX stock trades at a trailing PE ratio of 137.5, the seventh highest in the S&P 500. Incredibly, even its forward PE ratio of 56.7 is one of the 15 highest in the S&P 500. At the same time, NFLX stock is up 34% in 2019 and 629% in the past five years. Why? Because investors don’t care about 2019 or 2020. All they want to hear about is how much cash is going to be flowing in in 2025.
Changing the DIS Stock Narrative
The good news about this type of market mentality is that it takes the pressure off of these growth stocks. If investors are looking four or five years ahead, anything that happens in the meantime is forgiven as long as the story stays on track.
Prior to the launch of Disney+, DIS stock was mostly a bet on traditional cable TV and movies. Now, overnight, Disney has created a growth narrative with Disney+. Will it work? Probably. Disney has a long track record of success. But more important for DIS stock investors is that it doesn’t really matter if it works. As long as Disney does whatever it takes to grow subscribers, this market doesn’t seem to care about profits.
Disney can cut its prices to 99 cents a month, bundle its other services for free or give people free admission to Disneyland with a Disney+ account. As long as Disney hits that quarterly subscriber growth count, that’s all investors will care about in the near-term.
The post-launch stock surge is the perfect example of this market mentality. Disney+ is not even launching for another seven months. DIS stock investors were simply told an impressive story, and the stock is at all-time highs. It doesn’t matter if Disney ever makes a single dime of profit from Disney+. The company has changed the narrative, and that is good news for investors.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.