I asked the stockman what stocks I want to pass on to my children…

In a survey by brokerage firms asking which stocks they would like to pass on to their children, Disney always tops the list. Disney, which has intellectual property rights (IP) that spans generations from Mickey Mouse to the Avengers, is as good as Apple in terms of stock recognition.

But not many people actually bought Disney stock. This is because existing businesses, such as theme parks and media networks, do not have high growth potential, and thus have been rated as value stocks (share price relative to earnings). In a nutshell, the stock price showed an interesting trend.

During the COVID-19 crisis, Disney transformed and succeeded. While the theme parks, which accounted for 40% of sales, were closed, Disney Plus, an Internet video service (OTT), took the place. Disney is being re-evaluated as a growth stock. With the growth of Disney Plus, expectations for a share price rise are rising.

Disney grew up in crisis

Disney shares rose 1.85% to close at $184.34 on the 7th (local time). The stock price has been in the box all year round. This is because investor sentiment in the leisure and entertainment industry has contracted due to the re-spreading of COVID-19.

However, experts are not paying attention to the short-term stock price, but to the transformation of Disney. If you look at the history of Disney, it tried to change in every crisis, and that change served as a catalyst for the company to grow significantly.

Graphic = Reporter Lee Jung-hee

In the 1970s, Disney faced a limit to its growth simply by making existing short animations and television programs. Disney made a huge investment in nurturing the animation workforce and achieved technological innovation. The works created based on technology at this time include The Little Mermaid (1989), Beauty and the Beast (1991), Aladdin (1992), and The Lion King (1994), which led Disney’s heyday.

In the 1990s, traditional color animations declined in popularity. Computer graphics animation quickly took its place. Toy Story (1995) by Pixar Studios is the first 3D (three-dimensional) computer graphic feature-length animation. It was a big crisis for Disney. Disney quickly disposed of its animation-related facilities. Instead, it acquired Pixar Studios in 2006. In 2009, it also acquired Marvel Entertainment, gaining unrivaled IP competitiveness. Disney stock has more than tripled since its acquisition of Marvel.

game defense + growth

COVID-19 was a crisis for Disney. The proportion of theme park sales, which accounted for 41% of sales in 2018, was almost halved to 23%. But Disney moved the stage digitally. On November 12, 2019, OTT Disney Plus was officially launched.

The service has grown rapidly thanks to its rich content. Initially, the company set a target of 75 million subscribers for Disney Plus in 2024. Already this year, the target of 116 million people has been achieved early. Disney has set its target of 245 million people in 2024, more than triple its previous target. Disney’s powerful IP led to growth differentiated from other OTTs.

The pace of overseas expansion is also increasing. On the same day, Disney announced that Disney Plus would start its official service in Korea on November 12. It will be released in Hong Kong and Taiwan in the same month. In the second half of the year, the recovery of the theme park sector, which has been holding back stock prices, is expected to increase.

The existing valuations are also changing thanks to the growth of Disney+. Currently, Disney’s 12-month forward price-earnings ratio (PER) stands at 36x. Prior to COVID-19, it was traded at 20x. From the end of last year to the beginning of this year, it soared to 60-70 times.

It is a process in which the valuation of platform stocks is being recognized according to the growth of OTT. JP Morgan evaluated Disney in a recent report, saying, “Disney, which is showing continuous digital innovation and (performance) recovery in the existing industry, is the best choice in the media industry this year as well.”

Wall Street analysts are also raising their target prices in line with expectations for earnings improvement in 2H. Goldman Sachs raised its target price for Disney from $215 to $218. The Royal Bank of Canada also raised its target price to $210 from $202. Of 28 analysts, 21 expressed a buy opinion. Their average target price is $210.52, which suggests 14% upside potential. Our highest target price is $230.

Reporter Yoon-sang Ko kys@hankyung.com