Goldman Sachs initiates Disney at 'buy' with 15% upside as it expects streaming service to reach profitability next year and hit 150 million subscribers by 2025

• Disney has 15% upside potential as its recently launched Disney+ video-streaming service is poised to blow past analyst estimates over the next few years, according to Goldman Sachs.
• In a note published on Monday, Goldman initiated Disney at a "buy" rating with a 12-month price target of $137, arguing that Disney is "well-positioned" to pivot to streaming.
• Disney+ could reach profitability in 2021, two years ahead of consensus estimates, and hit 150 million subscribers by 2025, Goldman added.
• "We believe demand for Disney theme parks and theatrical releases will be high post-COVID, and that synergies between these segments and Disney+ are underappreciated by investors," Goldman said.
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Investors are underestimating the scalability and potential of Disney's recently launched video streaming service, Disney+, according to a note from Goldman Sachs published on Monday.

The firm initiated Disney at a "buy" rating and assigned a $137 one-year price target on shares, suggesting upside potential of 15% from Friday's close.

Disney is well positioned to reach "Netflix-like" scale and economics over time, thanks to its "best-in-class brand, global distribution, production assets, sizable content library, and strong financial profile position," Goldman said.

The bank said Disney+ could reach profitability in 2021, which is two years ahead of analysts' 2023 profitability estimate. It also said the service could have 150 million subscribers by 2025, which could "prove conservative, given that it implies only 22% global penetration of eligible mobile broadband subs," according to the note.

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Disney itself estimated that Disney+ would achieve profitability and reach 60 million to 90 million subscribers by 2024, proving to be wildly conservative given that since its launch less than a year ago, the service has more than 50 million subscribers.

Based on its sum-of-the-parts analysis, Goldman thinks the market is valuing Disney's direct-to-consumer segment "at a nearly 50-60% discount to Netflix based on implied 2022E subscriber valuations," the note said.

The main risk to Disney's video-streaming service business is ESPN, which has been under pressure as cord-cutting has picked up, Goldman added. ESPN is Disney's most profitable cable network. But as cable profits dwindle due to accelerated cord-cutting trends, Disney is well positioned to strongly pivot ESPN to direct-to-consumer "as needed," according to the note.

An additional risk to Disney is that a significant portion of its profits are driven by theme parks, resorts, cruises, and experiences, which means the media giant is highly exposed to a prolonged recession or a slow recovery, Goldman said.

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However, Disney's strong balance sheet means it could "ride out" a slow recovery, and Goldman expects a swift recovery for the unit anyway, with it likely to hit pre-COVID levels in 2022, according to the note.

"We believe demand for Disney theme parks and theatrical releases will be high post-COVID, and that synergies between these segments and Disney+ are underappreciated by its investors," Goldman said.

Disney traded up as much as 0.6% to $120.13 on Monday. Shares of Disney are down 17% year-to-date.