Disney: 3 Reasons To Buy The Drop

Core Insights - The Walt Disney Company has achieved significant progress in its direct-to-consumer (DTC) business, reaching operating profitability for the first time in Q1'24 [2] - The company is accelerating capital returns with a $3.0 billion stock buyback and an increased dividend, enhancing its attractiveness to dividend investors [2] - Disney aims to achieve a $7.5 billion cost savings target, which is expected to be a key catalyst for future growth [2] Subscriber Growth and ARPU - Disney+ has seen a growth in domestic subscribers, reaching 54 million by the end of Q2'24, with an addition of 7.7 million subscribers year-over-year [5] - The average revenue per user (ARPU) for Disney+ increased by $0.86 to $8.00 domestically and by $0.73 to $6.66 internationally [5][7] - Subscriber momentum and ARPU growth are critical for the ongoing success of Disney's DTC business [5] Profitability of DTC Business - Disney's DTC segment reported an operating income of $47 million in Q2'24, marking a significant turnaround from previous losses [10] - The DTC business has experienced a $634 million improvement in profitability compared to the previous year, indicating a major milestone for the company [10] - Continued growth in subscribers and ARPU is essential for maintaining this positive trajectory [10] Free Cash Flow and Capital Returns - Disney is projecting at least $8 billion in free cash flow for FY 2024, representing a 63% year-over-year increase from FY 2023 [12] - The company’s free cash flow guidance is driven by subscriber growth and cost-cutting measures [12] - Higher free cash flow could lead to increased capital returns to shareholders, enhancing investment appeal [13] Valuation and Market Position - Disney's current price-to-earnings ratio stands at 18.6, which is considered reasonable given its expected earnings growth [14] - The company is undergoing a cost restructuring and may raise subscription prices to further improve DTC profitability [15] - A fair value range for Disney's shares is estimated between $164 and $175, contingent on achieving cost savings and improving operating income [15]