With Streaming Business Turning Around, Is Disney Stock Attractive At $105?

+37.59%
Upside
99.55
Market
137
Trefis
DIS: Walt Disney logo
DIS
Walt Disney

Disney (NYSE:DIS) posted a mixed set of Q2 FY’24 results, with revenue growing just about 1% year-over-year to $22.08 billion, falling slightly short of estimates, although earnings were better than anticipated at $1.21 per share as the losses from the streaming business narrowed. However, Disney stock dropped by close to 10% in Tuesday’s trading, as the third-quarter outlook for its experiences segment was weaker than expected.

Disney’s theme park business has been driving its top line for several quarters now, as the core entertainment business faces headwinds. Experiences revenue rose by 10% year-over-year in Q2 to $8.4 billion, led by stronger guest spending in the U.S. theme parks and resorts, growth at the Disney Cruise Line operations, and higher attendance in the company’s Hong Kong parks. However, the outlook for the next quarter was lackluster, as the company expects higher expenses and a normalization in attendance following the surge in demand post-Covid-19.

Disney’s linear TV business saw some headwinds over Q2, amid lower advertising and weaker affiliate revenues in the domestic market. Overall Linear Networks sales were down 9% to $2.76 billion. However, Disney’s streaming business is faring much better, with streaming applications Disney+ and Hulu becoming profitable in the quarter for the first time led by a higher number of Disney+ subscribers and rising average per user revenues. Disney+ core subscribers rose by more than 6 million in the second quarter while total streaming revenue was up 13% to $5.64 billion, with operating income coming in at $47 million compared to a loss of $587 million in the year-ago period.

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DIS stock has suffered a sharp decline of 40% from levels of $180 in early January 2021 to around $105 now, vs. an increase of about 40% for the S&P 500 over this roughly 3-year period. Notably, DIS stock has underperformed the broader market in each of the last 3 years. Returns for the stock were -15% in 2021, -44% in 2022, and 4% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that DIS underperformed the S&P in 2021, 2022,  and 2023.  In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Communication Services sector including GOOG, META, and NFLX, and even for the mega-cap stars TSLA, MSFT, and AMZN.

In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.
Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could DIS face a similar situation as it did in 2021, 2022, and 2023 and underperform the S&P over the next 12 months – or will it see a recovery?

So, is Disney stock undervalued in the current environment? Despite concerns in the streaming and media operations, we remain positive on Disney stock for a couple of reasons. Disney is looking to unlock more value by restructuring its business while cutting costs to bolster profitability. Disney stock also remains down by over 45% from the highs seen in 2021 and trades at just about 23x forward earnings.  We value Disney stock at about $137 per share, which is about 30% ahead of the current market price. See our analysis of Disney’s valuation for a closer look at what’s driving our price estimate for Disney. Also, see our analysis of Disney revenue for a closer look at the company’s key revenue streams and how they have been trending.

Returns May 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 DIS Return -5% 17% 1%
 S&P 500 Return 3% 9% 131%
 Trefis Reinforced Value Portfolio 3% 3% 633%

[1] Returns as of 5/8/2024
[2] Cumulative total returns since the end of 2016

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