Why Goldman Sachs Is One of the Biggest Bulls on Disney After Earnings

Walt Disney Co. (NYSE: DIS) reported its most recent quarterly results after the markets closed on Thursday, and shares reached a new all-time high as a result. Despite the theme park business still suffering due to the pandemic, shares managed to push higher, and analysts were very optimistic as a result.

Goldman Sachs was the second biggest bull on Disney, with a Buy rating and a $225 price target, behind Loop Capital’s $230 price target. The Goldman Sachs price target implies an upside of roughly 18%.

The investment house had a couple key takeaways from the report:

First, the company approaches its first-ever price increases for Disney+ in Feb/Mar with considerable momentum. While investors have expressed some concern about how the sub base will respond to higher pricing, we believe the rich pipeline of new original content and other proactive measures by the company should mitigate risk of higher churn/slower sub growth. Indeed, successful execution here would be a meaningful proof-point for the service’s potential to profitably scale, in our view. Second, strong demand for Parks, which continue to operate at limited capacity, imply that DIS’s core businesses remain well positioned for rapid recovery as the economy reopens.

Goldman Sachs views the Theme Parks and Experiences recovery as nearing profitability, and the long-term viability of the business is intact. For the parks that are open (Walt Disney World and Disneyland Shanghai), management noted that it continues to cover variable expenses and drive improving contribution margins. For Walt Disney World in particular, capacity constraints continue to limit visitations (now up to 35%). For the fiscal second quarter, management expects Disneyland and Disneyland Paris to remain closed, and it hopes to reopen Hong Kong Disneyland by quarter-end.

For the fiscal 2022 year, management believes there will be a recovery as the COVID-19 vaccine rolls out and as the population becomes more comfortable with herd immunity. In the longer term, as operations eventually normalize, Goldman Sachs views pandemic as having provided Disney’s Parks segment with a clean state to reevaluate historical business practices, which could result in higher long-term profitability over pre-pandemic operations.

Disney+ beat healthily on subscriber growth in the quarter (21 million net adds versus the consensus of 16 million), driven by robust net adds from Disney+HotStar. Looking ahead to the fiscal second quarter and the remainder of fiscal 2021, the company remains confident its improved content slate and stepped-up marketing efforts will help drive continued penetration despite its first-ever price increases for Disney+, set to hit outside the United States on February 23 and in the United States on March 26.

Disney stock traded up about 1% at $193.10 on Friday. The 52-week range is $79.07 to $193.83, and the consensus price target is $188.70.

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