Disney Stock Reaches Its All-Time High – Time To Exit?

Despite rising more than 125% and having touched its all-time high in early March 2021 (reached $200 level on 8th March 2021), at the current price of $194 per share, Walt Disney stock (NYSE: DIS) still appears to have some upside left. Disney stock has increased from $86 to $194 off its recent bottom, compared to the S&P 500 which has increased 78% from its recent lows. The stock has been able to outperform the market due to an extremely strong performance of its streaming business Disney+ as streaming demand has been high during the pandemic. Along with continued strong demand for streaming, with gradual lifting of lockdowns and a successful vaccine rollout, Disney’s traditional businesses like cable and theme parks are also expected to see recovery in the coming quarters. Thus, despite the stock being near its all-time high, we believe expectations of higher revenue and earnings in 2021 and 2022 will provide Disney’s investors with a potential gain of around 10%. Our dashboard Buy Or Fear Walt Disney Stock has the underlying numbers.

Some of the stock price rise between 2018 and 2020 can be justified by the P/S multiple doubling from 2.7x to over 5x. During the same period Disney’s revenues increased 10% from $59.4 billion to $65.4 billion. However, with the number of shares rising sharply on account of acquisitions, on a per share basis the revenue fell almost 10% from $40 to $36 during this time. Thus, the rise in the P/S multiple was entirely driven by expectations of continued strong growth in streaming and the revival of traditional business segments. The P/S multiple, which currently stands at around 5.5x, is likely to remain elevated at the current level as revenue and earnings expectations remain strong for the near term.

Outlook

The global spread of coronavirus led to lockdown in various cities across the globe, which has affected industrial and economic activity. Due to lockdowns in almost all major cities over the globe, film shooting has been halted while amusement parks have been shut for months. The company’s traditional key revenue sources – theatrical, theme parks, etc. – has come to a virtual stop due to the pandemic. Additionally, the cord-cutting has led to a drop in Cable TV and advertising demand. This was evident in the Q3 2020 results of the company where Disney’s revenues declined 42% y-o-y. Things began to improve a bit in Q1 2021 (ending Dec 2020), where the y-o-y revenue decline was 22%.

There have been signs of reopening of the economy and lifting of lockdowns which led to a surge in the stock price. The successful vaccine rollout has also led to expectations of faster demand revival, with theatrical releases and reopening of theme parks likely to get back on track soon in the coming months. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. The company is currently focusing on streaming, with Disney+ having a subscriber base of 95 million in just one and a half years of operations. To put things in perspective, Netflix achieved a subscriber count of 200 million after a decade of operations; at the current rate Disney is likely to reach the milestone is a much shorter time. Additionally, the company’s traditional businesses are also likely to see a turnaround in 2021 and 2022 as advertising, theme parks, and cable revenues get back on track. Thus, with investors’ focus having shifted to 2021 and 2022 numbers, strong revenue and earnings growth in the next two years will drive a further rise in the stock price. As per Trefis, Disney’s valuation works out to $205 per share, higher than its current market price.

While Disney stock may have moved a lot, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how how the stock valuation for Netflix vs Tyler Technologies shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.

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