Goldman Sees Netflix-Like Potential in Disney+, Initiates with BUY Rating
Goldman Sachs thinks Disney+ has the potential to mimic the scale and economics of Netflix. The firm initiated coverage of Disney with a BUY rating and a 12-month price target of $137 on Monday, calling the company a favorite to emerge from cable TV’s cord-cutting avalanche as a winner.
“We believe the market is undervaluing its DTC segment by >50%, based on our outlook for Disney+ reach to 150mn subs by 2025 and to achieve profitability by F2021 (consensus F2023), two years faster than consensus.”
Undervalued DTC compared to Netflix: Goldman says Disney’s DTC segment is valued at a nearly 50-60% discount to Netflix based on the firm’s sum-of-the-parts analysis calculated from implied 2022E subscriber valuations and revenue multiples.
“Based on our outlook for Disney+ to approach Netflix-like scale and economics over the next five years, we believe such a material discount to this peer is unwarranted, and expect this valuation gap to close as Disney+ ramps its customer base and achieves profitability.”
712 million: Goldman believes its estimate for 150 million subs by 2025 could prove conservative because it only accounts for 22% of the firm’s estimated global addressable market of 712 million.
Mobile broadband: Smartphones are the key to international penetration because most overseas consumers access the internet through mobile rather than fixed broadband inside the home. In Disney’s target launch markets, there are 1.78 billion smartphone users that are able to afford Disney+, according to Goldman’s analysis. Assuming an average of about 2.5 accounts under each subscription, Goldman arrives at an estimated market of 712 million for Disney+.
ESPN is the elephant in the room: Disney’s most profitable cable network is getting attacked on multiple fronts. First, the absence of sports has created a content desert for ESPN, which has been forced to air South Korean baseball and eSports streams. While the return of sports will eventually happen, the longer-term problem for ESPN is the acceleration of cord-cutting, which Goldman calls the primary risk to Disney’s video businesses.
Reason for concern: ESPN could suffer from a mass exodus. Goldman says ESPN’s subscriber base could drop by half as non-sports fans move away from cable and toward streaming services that may not include ESPN.
“Viewership data implies that fewer than 50% of cable subscribers that have ESPN included in their channel bundle watch the network (for six consecutive minutes) in any given month.”
Reason for optimism: Despite the challenges, Goldman expects Disney to find a solution by leveraging its live-streaming technology platform BAMTech, and believes early success with ad monetization on Hulu is a sign ESPN can make the pivot to DTC.
