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Disney Can Rise 27% Based on Its Powerful Q1 Revenue Growth

On Feb. 9, The Walt Disney Company (NYSE:DIS) reported stellar fiscal first-quarter earnings for the period ending Jan. 1. As a result, DIS stock is likely to power ahead this year if this keeps up.

Source: spiderman777 / Shutterstock.com

On Feb. 9, The Walt Disney Company (NYSE:DIS) reported stellar fiscal first-quarter earnings for the period ending Jan. 1. As a result, DIS stock is likely to power ahead this year if this keeps up.

Source: spiderman777 / Shutterstock.com

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In fact, since the numbers came out, the stock has been on a rebound. As of Feb. 10, DIS stock closed at $152.16. That was just below $154.89, where it closed on Dec. 31, 2021.

Moreover, if the next few quarters turn out as strong as this one, then investors can expect to see DIS stock much higher by the end of the year.

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Where Things Stand at Disney

Disney reported on Feb. 9 that its fiscal Q1 revenue was up 34% year-over-year (YOY) to $21.8 billion. This followed the fiscal Q4 ended Oct. 2, when sales were up 26% to $18.5 billion.

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In other words, revenue seems to be accelerating in terms of YOY growth. Much of its steady growth is coming from its Media and Entertainment Distribution division, which makes up two-thirds of total revenue.

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The Media division had revenue growth of 15% YOY, but produced almost half of the dollar revenue gains. The rest came from its Parks, Experience and Products division, which doubled revenue YOY.

As Barron’s puts it, the “battle for consumer eyeballs” in streaming wars is starting to intensify. Disney added 11.8 million new subscribers, which beat expectations. It was also much better than Netflix’s (NASDAQ:NFLX) 8.3 million net adds. Moreover, Netflix projected it will gain just 2.5 million new subscribers this quarter.

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In addition, Disney CEO Bob Chapek said he expects stronger growth in the second half for Disney. A good portion of that will come from robust growth in its theme parks division, as most of its locations are now open.

Moreover, its bottom line was very good. Net income was up to $1.15 billion from negligible amounts last year due to Covid-19. In fact, its Q4 net income was only $160 million, so this was a huge gain on a sequential basis.

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Free Cash Flow Suffers

However, due to the battle for eyeballs and the massive amounts of spending on new content, free cash flow (FCF) worsened this quarter. Disney reported an outflow of negative $1.19 billion in its fiscal Q1.

By contrast, last quarter the company produced a positive FCF of $1.522 billion. So, this is a $2.7 billion swing in just three months, indicative of the huge amounts it’s spending to attract new viewers with Disney Plus, Hulu and ESPN.

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Moreover, Disney has had mixed results with its average revenue per user (ARPU). The Disney Plus service’s ARPU is up almost 10% YOY, but the Hulu SVOD subscription service was down 4%.

This is likely to rise, however, as the company’s huge investments in movie, TV and distribution platforms begin to pay off. And, of course, there is the Disney brand mystique, which always helps sales.

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What to Do With DIS Stock

Analysts are very positive about DIS stock, especially after the recent results. The average price target for Disney based on a TipRanks survey of 19 analysts was $193.33 per share as of Feb. 10. This is 27% over yesterday’s price of $152.16.

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The same is true with Seeking Alpha’s survey of 30 analysts. Their average price target works out to $192.35, or 26.4% over today’s price.

In addition, I suspect analysts will raise their price targets for DIS stock going forward, given its strong results this past quarter. Long-term value investors should be pleased with these numbers.

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Hopefully, Disney will someday consider restoring its dividend as well. However, as long as it is spending heavily on content and FCF is negative, this might not happen for a good while.

On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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Mark Hake writes about personal finance on mrhake.medium.com and Newsbreak.com runs the Total Yield Value Guide which you can review here.

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