Analysis: DIS NFLX

Disney (DIS) shares are surging to new all-time highs following the company's Direct-to-Consumer focused Investor Day event that was held Thursday night. You can find the slide deck of the presentation at the link here. It's a long one, but it is a good one as management updated several key performance targets and provided color on all its streaming platforms.

Taking a step back for a moment, it is hard to believe it was less than two years ago when Disney first unveiled its Disney+ streaming service at the April 2019 investor event, which you can read about here. But in a very short amount of time, Disney has created a service that reaches millions of households around the globe and has produced a pop culture phenomena in Baby Yoda from the hit tv show The Mandalorian.

Here is what you need to know from last night:

Starting first with the Disney+, management said that the service had 86.8 million subscribers as of Dec. 2. To put some perspective around this extraordinary figure, at management's 2019 event they forecasted 60 to 90 million subscribers in fiscal year 2024 (September). Given this outperformance and management's launch plan, the company now expects 230 to 260 million subscribers by the end of fiscal year 2024. This new target was well ahead from what Wall Street was expecting, including analysts at Goldman Sachs -- who went to a new Street high DIS price target of $200 this morning following the event -- which was looking for 165 million subscribers by this date.

One of the few gripes about Disney+ is the amount of content available on the platform compared to rival services such as Netflix (NFLX) , but quality content is coming in a very, very big way. Last night Disney announced a plethora of projects that will be headlined by household names in the TV and Film industry. Over the next few years, several highly anticipated projects will hit the streaming service, including 10 new projects from both Marvel and Star Wars, 15 Disney live-actions, animation, and Pixar series, as well as 15 Disney live action, animation, and Pixar films. Additionally, management's goal is to launch a massive 100+ titles to Disney+ per year.

When a company introduces a universally praised and highly popular product like Disney+, the next step you want to see from it is some flexing of pricing power. Over the long-run, incrementally higher prices of a subscription-based product creates significant operating leverage. We got this news from Disney last night after management said it will raise the price of subscriptions by $1.00 to $7.99 per month in the United States and EUR2.00 to EUR8.99 per month in continental Europe.

These price hikes will also help the company offset costs needed to produce more content, which in turn should continue fuel subscription growth and keep churn low. On this topic, the company said its content expense outlook will be $8 billion to $9 billion in fiscal year 2024, about double what was initially laid out at the April 2019 investor day. That's a lot of investment in content, but Disney should have substantial profits from its Theme Parks business (post-vaccine) to fund these necessary expenses. Also, what's important here is that the balance of investment is being offset by the incredibly strong subscription growth, and this could be partially why profitability is still on track for fiscal year 2024.

For Hulu, management said its subscriber count as of Dec. 2 was 38.8 million. This positively compares to prior FY 2024 guidance of 40 million to 60 million, but this outlook was narrowed to 50 million to 60 million last night. In addition, management revised its profitability forecast for FY 2023, an improvement from a previous outlook for FY 2023 or FY 2024. Of note, Disney called out that FX-related content has shown a lot of viewership interest on the platform, and Disney will continue to invest in the network to bring more series to the platform. Same goes for films from 20th Century and Searchlight.

Regarding ESPN+, management announced the service had 11.5 million subscribers as of Dec. 2. Originally management's target was for 8 million to 12 million subscribers by FY 2024, but now they expect subscribers to grow to 20 to 30 million by then with profitability still expected in FY 2023. Although management is not keen on shifting too many live sports games from traditional TV to direct on the platform due to weaker economics, the company continues to work on securing rights and developing/expanding its lineup of original content.

In total, Disney now projects it could reach 300 to 350 million global subscribers across its different offerings in FY 2024. If management can deliver on this target, analysts at Morgan Stanley think Disney could match or surpass Netflix in customers. Morgan Stanley also said that if Disney hits its subscriber goal, "at potentially $35bn in revenues, it would leave streaming as its single largest business. Finally, it would complete a transformation of the company and open up additional opportunities over time."

We always say no one can tell a story like Disney, and once again they did not disappoint. We are increasing our price target to $190 and continue to see Disney as a great way to play the full reopening of the economy (we expect tremendous pent-up demand at their Theme Parks) and a transformation from the secular declining traditional TV industry to a subscription-based direct-to-consumer streaming platform.