Should You Buy, Sell Or Hold Disney Stock At $100?

DIS: Walt Disney logo
Walt Disney

Disney stock (NYSE:DIS) has seen a major sell-off this year, declining by almost 37% year-to-date, considerably underperforming the S&P 500 which remains down by 19% over the same period. The stock also remains down by almost 50% from highs seen in 2021.  Disney stock is now trading around levels last seen around April 2020 just as the first set of Covid-19 lockdowns roiled the broader markets.

There are several factors weighing the stock down. The streaming industry, in general, has been facing headwinds as people consume less content online as the economy opens up post-Covid. Disney’s flagship Disney+ – which was a big driver of Disney stock in recent years – saw subscriber additions hold up better than rivals, with the company adding 7.9 million subscribers over the last quarter, compared to Netflix which lost subscribers. However, the streaming business remains cash-intensive with Disney ramping up content spending by $8 billion this year to support its Direct to consumer offering,  while projecting that the business will only be profitable in 2024. Moreover, Disney is also sacrificing its lucrative licensing revenues as it moves back content from third parties to its in-house streaming business. This isn’t going down well with investors, who are increasingly focusing on cash flows as interest rates rise. Disney has also seen a public relations crisis of sorts relating to its handling of Florida’s controversial Parental Rights in Education legislation, which has, in turn, made Florida lawmakers pass legislation that would strip Disney of self-governing status in the state from next year.

Despite the recent concerns in the streaming industry, we think Disney stock looks like a buy for a couple of reasons. Disney’s earnings are likely to rebound strongly this year, driven primarily by the recovery in its lucrative theme park business. Over Q2 FY’22, Disney’s Parks, Experiences, and Products segment’s results came in ahead of expectations at  $6.7 billion, marking an increase of 110% year-over-year, despite this being a seasonably weak quarter which also saw a surge in omicron-related Covid cases. Per capita spending in Disney’s parks has also soared by 40% in Q2, versus the same period in the pre-pandemic era, indicating that these assets could emerge stronger than pre-pandemic levels, generating sizable cashflows for Disney and potentially masking some of the impacts of rising content investments.

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Investors probably shouldn’t worry too much about the rising investments Disney is making into its content and streaming operations. Unlike Netflix, which monetizes its content investment solely via monthly subscription fees, Disney has a much larger value chain, given its theatrical business, theme parks, merchandise, and licensing operations. Disney’s content investments are also likely to be much more durable, given its iconic franchises, unlike Netflix which focuses a lot more on one-off shows.

Disney’s valuation multiples are also reasonably compelling. The stock trades at about 25x consensus 2022 earnings and about 19x consensus 2023 earnings and things should only get better as streaming eventually contributes to Disney’s bottom line. We value Disney stock at about $150 per share, which is roughly 50% ahead of the current market price. See our analysis of Disney valuation for more information on what’s driving our price estimate for Disney and how its valuation compares with peers. See our analysis of Disney revenue for a closer look at the company’s key revenue streams and how they have been trending.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

 Returns Jun 2022
MTD [1]
YTD [1]
Total [2]
 DIS Return -10% -36% -5%
 S&P 500 Return 0% -14% 84%
 Trefis Multi-Strategy Portfolio -4% -22% 207%

[1] Month-to-date and year-to-date as of 6/13/2022
[2] Cumulative total returns since the end of 2016

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