Part 6

Walt Disney (DIS)

Company Background

The Walt Disney Company is a diversified international family entertainment and media enterprise. It operates through a few different segments: Media Networks, Parks, Experiences and Products, Studio Entertainment and Direct-to-Consumer and International (DTCI). Founded back in 1923 by Walt and Roy Disney, the company has got almost 100 years of history in producing quality content and making families and children happy all around the globe. Walt Disney’s products include: television, publishing, films, music, video games, amusement parks, broadcasting, and radio and web portals. The company has become a global leader in the sector it operates and that has been reflecting on its share price performance especially in the past few years. The stock had been up 50% since the end of 2016 until early 2020 and there has been a clear uptrend going on the stock during that period of time. Yet, 2019 has definitely been the best year for Disney so far with the stock rising 35%, beating the market’s benchmark S&P 500 and its 28% gain during that period of time.

The market was in a very strong bullish rally throughout 2019, but that is not the only reason as to why the company managed to deliver such strong financial results and the stock price has spiked up so much. There has been a new major factor for Disney’s growth – the company’s new service – Disney+ (Disney Plus). Now, let’s have a look at the numbers.

Current Position – Financial Performance and Future Growth Prospects

Walt Disney delivered strong financial results in the past few years, which has been leading to more buying interest among investors and traders and that has been driving the stock price higher.

The December 2019 ending quarter’s results were very strong and the company showed an increase in both revenue and profitability, driven by top-line growth across all of their segments, most particularly the Studio Entertainment and Direct-to-Consumer (DTC) businesses. In fact, the company has seen a great success on its recent movies Frozen II and Star Wars: The Rise of Skywalker, which boosted Studio Entertainment’s revenues. Actually, The Rise of Skywalker coming out in December 2019 had a great global debut with $198.8 million in sales, making it the No.1 western film in nearly all markets out there.

Furthermore, Disney+ attracted its users immediately and helped the company gain a solid user base within a very short period of time based on its strong content portfolio and a cheaper bundle offering.

In fact, the company’s financial statements had been showing a continuous improvement over the past 5 years since 2015. The sales had been growing steadily around 6-7% a year between 2015 and 2019, followed by a significant increase of 15% in 2019, led by the company’s acquisition of Twenty First Century Fox in March 2019. Disney acquired its competitor’s film and television studios, as well as its US cable and satellite channels, such as Fox Networks Group International, a 73% stake in National Geographic Partners, Indian television broadcaster Star India, and a 30% stake in Hulu. The acquisition let the company add Twenty First Century Fox’s assets and products contribute to Disney’s content portfolio. Fox’s television business is expected to increase Disney’s TV presence globally. In fact, one of the main reasons Disney acquired Fox was in order to strengthen its TV slate on a global basis and increase its international footprint after the acquisition. One should know that Fox Networks International operates above 350 channels in 170 countries and is a leader in this sector.

In fact, Disney’s Studio Entertainment segment has got an impressive line-up of huge budget movies that would be released over the next 18 months, such as Mulan, Free Guy and Black Widow.

By looking at the financials, we should say that Disney’s net profits had been very solid as well in the past few years before the COVID-19 pandemic.

Looking at the current situation, we should note that Disney has been hurt significantly by the virus and sales as well as net profits have decreased. In fact, the company’s sales decreased almost 50% in the 9 months period between September 2019 and June 2020.

The company has managed to keep growing its business in the past few years and deliver strong financial figures without overleveraging itself. In other words, the debt-to-equity ratio of Walt Disney had been only between 0.37 and 0.40 before the pandemic, meaning the company has been growing mainly organically, without taking too much debt and putting its financial performance under risk. Now, due to the virus and the fact that the company has been losing money caused by the closure of the Disney resorts and not operating properly for a few months, the company needed to issue some more debt. Therefore, the debt-to-equity-ratio has grown to 0.60. Let’s face it. There has been an increase in the ratio and the company has leveraged itself a bit more. However, it is not overleveraged and we believe it is only a matter of time before the company manages to decrease the debt in its financial statements and bring it back to the levels it used to be in early 2020. Of course, we take into account the fact that it might take some more time for that due to the 2nd wave of coronavirus and thus the lower revenues coming from the company’s resorts.

Yet, due to the significant rally across the US equity markets in the last few months Walt Disney’s stock as also experience a tremendous price increase as it currently stands at $171 per share after reaching its all-time highs around $183. Our last recommendation on the stock was at $127, which ended up generating a remarkable 44% return for our followers in less than 8 weeks! At the time, trading at $127, the stock was selling for only 2.55x its book value, which made it an attractive investment. Currently, as a result of the sharp increase in the price the stock is trading for 3.69x its book value, which is quite pricey. Thus, we expect to see the stock coming a little bit lower before it regains its attractiveness. However, it depends on your investment horizon as if you are looking to hold the stock long-term, then you could still buy it today as the company has excellent long-term growth prospects. On the other hand if you are looking to book the best possible gain over the next few weeks or months, then you should wait for the price to retrace further towards the $160 and $140 levels, where it will be trading for 3.47x and 3.04x its book value respectively.

The difference maker – Disney+

Walt Disney Co. launched its own direct-to-consumer service Disney+ on November 12, 2019 in the United States, Canada and the Netherlands, followed by its debut in Australia, New Zealand and Puerto Rico a week later. The service was launched on March 24 in different markets across Western Europe – the UK, Ireland, France, Germany, Italy, Spain, Austria and Switzerland, together with India a week later. Disney+ offers nearly 500 movies and 7,500 episodes of television from a variety of different brands, such as Disney, Marvel, Pixar, Star Wars and National Geographic, as well as Disney+ originals. Furthermore, Disney+ only costs $6.99 a month or $69.99 a year, which is half the price of their competitors at Netflix for example.

By looking at the official data released on the Company’s website, only 3 months since Disney launched its game-changing Disney+ service, the company had already grown its paid subscribers to 29 million. Now, they have already doubled that figure and the company has already managed to grow its paid subscribers base to over 60 million people. Disney expected its Disney+ to have between 60 million and 90 million paid subscribers globally by the end of 2024. Well, they have already reached their first goal only a year since the launch of their game-changing product. The CEO of the company has said that while Disney is expected to keep growing the number of subscribers in the future, it will remain focused on providing quality content for its followers, increasing its presence in the market it operates, which of course would have a very positive effect on the company’s overall financial performance and that will make more money for its shareholders. Moreover, thanks to the great content Disney provides its customers with, the Company ranked 4th for a second consecutive year among the world’s most admired companies on Fortune’s annual list.

Technical analysis

By looking at the daily chart, we can see the strong bullish rally that has occurred in the period March-September taking the price from the March 17th lows of around $80 to the $137 in the beginning of September. Since then, we have seen a very common trend continuation pattern consisting of an initial strong volatile correction, which is then followed by a sideways price action with a slight downward corrective bias. This creates a diagonal downward sloping resistance line following the corrective movement, which if broken to the upside signals the resumption of the long-term trend. Once again this widely used chart pattern was highly accurate in the prediction of the next big move in the market, as the stock broke higher with a huge price gap, following the better than expected financial performance in its last earnings report. The strong diagonal resistance line at around $134 was broken, which was followed by an impulsive move higher, thus breaking the prior highs and setting new all-time highs at $183. The stock is currently sitting at the $171 mark after being initially rejected by the new ATH levels mentioned above. Our analysis shows that the stock will most likely move within the current downward channel, and will retest the 50 DMA and the 100 DMA dynamic support levels currently lying at $160 and $142. That is where we expect to see substantial buying interest, which will then lead to an uptrend continuation. However, we believe that this 10-20% corrective movement from the ATH will be provoked by nothing else but a short-term profit taking interest in the market.

While we believe that the stock market in the US is currently holding a lot of intrinsic risks surrounding COVID-19, the transition of power in the White House, the economic recovery etc. and that we could be in for a sideways and choppy price action in the coming weeks, which in turn could affect a lot of the stocks negatively, we see that the winners will most likely continue to win. We remain bullish on the Walt Disney’s stock and believe that all these profit-taking corrections are giving us great opportunities to buy the stock at a good discount, which would in turn give us a chance to maximize our profits to the upside. Moreover, some of the technical indicators that we are monitoring closely (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) have been pushing lower, thus confirming the short-term bearish momentum for the stock. However, we are strongly bullish on DIS and will be actively adding to our long-term holdings around the $160 and $140 marks.

The daily chart shows that the price is currently testing the first minor horizontal support line at $169. Considering the fact that new all-time highs were set recently we should remember that this is a stock that has recently attracted a lot of investors interest and that after a short correction this interest could be coming back very quickly.

We will start buying DIS at $163, just above the major support at $160 where lots of buying pressure is expected. In case the price breaks the support and drops further, we will be interested in adding more to our buy positions at the next strong support at $143. Our first take profit target is at $198, followed by the next target at $210 where we will be fully closing our positions and collecting the profits.

Adobe (ADBE)

-Last recommended @468, generated 10.4% return in 2 weeks

Company Background

San Jose California-based Adobe Inc. is one of the largest software companies in the world. Adobe generates the largest portion of its revenue from collecting licensing fees from its customers.

The company also offers technical support and education, which have a much smaller contribution for Adobe’s revenues but are still important services as they allow the company to close the whole services circle.

The company generally operates in three segments: Digital Media, Digital Experience, Publishing

The Digital Media solutions segment provides small businesses and enterprises with the opportunity not only to create highly compelling content, but to also deliver it across a variety of different media channels, platforms and devices – smartphones, tablets, e-readers, and other devices, and then optimize it through systematic targeting and measurement.

The two major components of revenue in the Digital Media solutions segment are the Creative family of products and Document Services products. The target customers are traditional content creators, web application developers, digital media professionals and user interface designers/developers, writers, videographers and photographers.

The Digital Experience segment serves as a business optimization tool focusing on providing businesses with insights into the performance of digital marketing initiatives, thus empowering organizations to make informed decisions, and tries to ensure the success of online marketing programs. The target customers are digital marketers, advertisers, publishers, merchandisers, web analysts, chief marketing officers and chief revenue officers.

The Publishing segment supports technical and business publishing through a special printing and imaging page description language and a PDF-based workflow regulation platform. The target customers are professional graphics and content publishers, as well as OEMs offering workflow software, printers and other output devices.

The company has offices in several countries which include the likes of Australia, Austria, Belgium, Brazil, Canada, Chile, China, Columbia, Czech Republic, Denmark, Finland, France, Germany, Hong Kong, India, Ireland, Israel, Italy, Japan and Mexico, to name a few.

Current Position – Financial Performance and Future Growth Prospects

In fiscal 2019, the company generated $11.17 billion in revenue, which was derived from 3 segments—Digital Media solutions (69% of 2019 revenues), Digital Marketing solutions (28%) and Print and Publishing contributed the remaining 3%. Adobe has a solid balance sheet. At fiscal second quarter-end, cash and short-term investment balance was $4.35 billion, slightly up from $4.17 billion in the prior quarter. Trade receivables were $1.37 billion, down from $1.39 billion recorded in the fiscal first quarter. Cash generated from operations was $1.18 billion versus $1.32 billion in the fiscal first quarter. During the reported quarter, the company repurchased 2.6 million shares.

Adobe Inc. reported fourth-quarter fiscal 2020 non-GAAP earnings of $2.81 per share, which surpassed the Zacks Consensus Estimate of $2.65. The figure increased 9.3% sequentially and 22.7% on a year-over-year basis.

Adjusted revenues jumped 14% year over year to $3.42 billion. This upside was driven by strong demand for the company’s digital and creative software tools. Adobe reports revenues in three categories — subscription, product, and services & other.

Subscription revenues came in at $3.1 billion (accounting for 91% of its total revenues), up 20.8% on a year-over-year basis. Product revenues totaled $127 million (3.7% of revenues), down 24% year over year. Services & other revenues came in at $182 million (5.3% of revenues), decreasing 26% year over year.

Management said the shift to remote work has driven the demand for digital documents. This led to a 40% sequential increase in the use of web-based PDF services. Also, the number of documents shared in Acrobat increased 50% year over year. Increased mobile usage led to 43% year-over-year increase in Acrobat Reader installations and 66% growth in Adobe Scan installations.

Furthermore, the strong net cash balance will not only help it pursue strategic acquisitions but will also enable it repurchase shares aggressively in the long haul.

Adobe continues to be the market leader in the Digital Media space. The broad-based success of the company comes from the fact that it simply provides one of the best solutions in most categories of the digital world including media design, publishing, Internet and video. In fiscal first quarter, total Digital Media ARR (Annualized recurring revenue), the key cloud performance measure, grew to $8.73 billion. This indicates that the company has seen strong growth in the Creative Cloud and Document Cloud businesses. The digitalization of advertising, entertainment and other content-creation markets is a great long-term positive for the company as Adobe is well positioned to benefit from this trend and should enjoy above-average long-term growth. The acquisition of Omniture was considered to be a rather bold step that Adobe took in order to enter the digital marketing space. This is an area where corporate spending is on the rise. A number of trends are supporting this trend, including the increased adoption of cloud computing, social media and mobile devices, as well as the emergence of big data analytics. Adobe’s current success has been built over the last decade through the great visionary leadership by the senior management of the company. A series of successive acquisitions have enabled the company to provide the full-spectrum of services in the specific sub- industry that it operates in like: analytics, experience management, targeting, social relevance and spend optimization. Furthermore, Acrobat is one of the company’s most successful product lines with a huge installed base of satisfied customers. Through Acrobat.com, the company offers a set of a cloud-based document and collaboration subscription services which include PDF creation, centralized online file sharing and contract signing solutions.

Technical Analysis

By looking at the daily chart, we can see the strong bullish rally that occurred in the period April – September 2020 taking the price from the March 17th lows of around $255 to the $537 all-time highs in the beginning of September. This represented a phenomenal 111% appreciation for the stock in just 5 months. Since then, we have seen a volatile correction that initially took the price down with over 15% in less than 2 weeks, right before we recommended it at $468 level back in September. The stock quickly recovered back to $516 where we recommended for some profits to be taken. In general, the stock has had an amazing run throughout the last 10 months, but we must say that we have seen a rather sideways price action in the period October-December 2020, which in turn is considered healthy for the long-term uptrend as it allows investors to re-position themselves. ADBE is currently sitting again at the $469 mark after experiencing a minor new year selloff from the $509 highs. This correction was anticipated by us as nothing can go up or down in a straight line forever and after the 5 month long strong bullish it was more than normal for us to see a downward and/or a sideways corrective movement.

While we believe that the stock market in the US is currently holding a lot of intrinsic risks – COVID-19, the upcoming presidential elections, the economic recovery etc. – and that we could be in for a sideways and choppy price action in the coming months, we see the winners continuing to win. We remain bullish on the ADBE’s stock and believe that any profit-taking corrections would give us a great opportunity to buy the stock at a good discount. This, in turn would give us a chance to maximize our profits to the upside, once the stock resumes its strong uptrend. Furthermore, some of the technical indicators that we are monitoring closely (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) have already retraced from extreme overbought conditions and are signaling that a potential upward trend continuation move might occur very soon.

We will start buying ADBE at $450, just above the major support at $449 where lots of buying pressure is expected. In case the price breaks the support and drops further, we will be interested in adding more to our buy positions at the next strong support at $430. Our first take profit target is at $550, followed by the next target at $585 where we will be fully closing our positions and collecting the profits.

Additionally, we shouldn’t forget that the SPY and XLC share a very strong 10-year positive correlation of 94%, which following DowExpert’s investment philosophy means that if one of the two ETFs issues a signal there is a 94% probability that the other ETF will follow suit. Thus, we believe that the broad economic weakness in the US and the uncertainty surrounding the process of recovering to pre-COVID-19 levels in terms of productivity, job creation, consumer spending and inflation, will be the driving fundamental forces behind the expected short-term market declines in the coming weeks and months. In addition to that, we should also factor in the uncertainty around the process of administration change in the White House as the impeachment process has already been started. We also believe that this might lead to further retaliation by some of Trump’s hardcore supporters, which might result in additional social unrest in the US throughout January. As a result of that, we want to see how ADBE’s stock will act around its current strong support zone as if it fails to hold it, then we should expect the stock to move lower in the coming weeks towards the $467 level and a potential secondary target at $400 before resuming its stronger long-term uptrend.

The daily chart shows that the price is currently testing this important conflux of supports, which appears to be holding quite firmly for now. We believe that the short-term correction for the stock is almost over and that it will soon resume its uptrend movement. However, if the tensions in the US resume next week and we see heavy collisions between rioters and the police, then the whole market will be brought lower and the price of the stock will most likely manage to break the current support levels in play. The stock is expected to find lots of buying pressure around the above-mentioned support marks, which will inevitably send the price back to the all-time highs around $537.

Sincerely,

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