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Disney Ended the Year on a High Note. Why 2021 Could Be Even More Exciting.

Olga Thompson/Walt Disney World Resort via Getty Images

As the year drew to a close, we took a look at all 30 stocks in the Dow Jones Industrial Average, starting with the worst performers— Boeing and Walgreens Boots Alliance —and working our way up to the highest-flying stock in the benchmark— Apple.

Walt Disney (ticker: DIS) stock took quite a round trip in 2020. After dropping some 40% in the first three months of the year, it has more than doubled since—and unexpectedly ended the year with a 25.3% gain.

The rapid growth of Disney’s streaming services—and their future potential—far outshined a near-perfect storm for the rest of the company’s businesses during the Covid-19 pandemic. With movie theaters and theme parks closed, sports seasons shortened and delayed, and television and film production disrupted, it’s no surprise that Disney’s revenues tumbled, earnings went negative, and the dividend was shelved in 2020. During the most severe months of global Covid-19 lockdowns in the calendar second quarter, the entertainment conglomerate’s sales were 42% lower than they were a year earlier and its quarterly net loss totaled nearly $5 billion.

However, none of that mattered to forward-looking investors. While the pandemic has been an unprecedented drag on Disney’s legacy businesses, it’s been a tremendous boon for its streaming services: Since launching in November 2019, Disney + has rapidly grown to 87 million subscribers worldwide, and Hulu and ESPN+ have added about 39 million and 11.5 million subscribers, respectively, as of early December.

That’s where Disney’s future lies—and the pandemic, if anything, has given the company cover to accelerate its transition to a streaming-centric operation. The decision to debut big-budget films on Disney+—including the live-action remake of “Mulan” for an extra fee and Pixar’s “Soul” at no additional charge—was much easier by the fact that movie theaters were largely closed in 2020. Millions of people worldwide who were stuck at home during quarantines and lockdowns turned to streaming services for entertainment, boosting signups.

Investors have come around to viewing Disney as more of a growth-oriented streaming play similar to Netflix (NFLX) rather than an old media-dependent entertainment conglomerate. That’s what’s behind the stock’s outperformance in 2020: the value of its still-unprofitable streaming segment has grown faster than its pandemic-impaired businesses have declined. But that was happening anyway, the logic goes—and Covid-19 vaulted Disney several years into the future.

The coming year will an eventful one for the Mouse House: the company will debut Star, a new international service, in numerous markets in Europe, Asia, and Latin America starting in February 2021. It will include general entertainment programming, similar to Hulu in the U.S. Depending on the country, Star may be packaged with Disney+ and include sports content, too. A price hike is also in the cards for Disney+ next year: The cost will rise by $1 a month, to $7.99, in the U.S. starting in March, with other countries seeing similar increases in their local currencies.

Disney also unveiled ambitious new goals at an investor day in December: The company expects to have as many as 350 million subscribers globally across all its services within four years, when it could be spending $16 billion on new shows and movies to keep subscribers signing up and engaging. Investors and analysts will be keeping tabs on its progress in 2021, when the pandemic will eventually cease to be such a streaming tailwind.

As for Disney’s non-streaming businesses, the widespread rollout of Covid-19 vaccines and a healing global economy will likely mean a return to more “normal” activity. If local restrictions are lifted, the company’s theme parks could see a major rebound: Disneyland and Disney World could be popular destinations for families still wary of international travel.

Disney’s TV networks—such as ABC, ESPN, and FX—should see a rebound in advertising as sports seasons resume. The future of movie theaters is more of an open question, and one that might not have a clear answer for several more years. Disney management has kept its options open for future films, and will likely continue to experiment with its release strategy. Big-budget Marvel and Star Wars movies could be released in theaters, while lower-profile films could be slated for streaming-only debuts.

The fate of Disney’s semiannual dividend is also a question that will be answered in 2021. The company suspended its last two payouts, citing the pressures of the pandemic and desire to continue investing in its streaming initiatives.

“Disney brings with it all three themes: secular growth [through streaming,] reopening through Parks, and cyclical exposure through advertising and consumer products,” Morgan Stanley analyst Benjamin Swinburne wrote in a recent report. “In [2021,] we think the reopening trends at the Parks could be a large driver of shares as the streaming debate plays out over a longer period of time.”

Swinburne has the equivalent of a Buy rating on Disney stock. His $200 price target ascribes about $120 per share in value to Disney’s streaming business.

Disney closed out the year at $181.18 per share—while the average price target is $179.54, according to FactSet. Nearly three quarters of analysts tracked by the service have a Buy or equivalent rating. The Dow Jones Industrial Average has returned 9% including dividends in 2020.

Write to Nicholas Jasinski at [email protected]

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