Disney (DIS) is a brand that evokes nostalgia while also embracing innovation. Its diverse revenue streams, cruise ships, iconic legacy, and high-ticket theme parks make it an attractive investment.
Recently, the stock has been fluctuating around the $100 mark, down from $156 ten months ago, so is now the time to buy this “magical” stock on the dip?
Disney Hit Some Roadblocks
In the past year, Disney’s stock plunged. But why?
The entertainment company had traditionally focused on blockbuster movies and shows, but has in recent years shifted its strategy to streaming due to their more sticky revenues. In 2020, Disney+ launched, and the company has since invested heavily in content for both that platform and its theatrical releases. Disney continues to produce high-quality content, as evidenced by its #1 ranking at the box office in 2022.
Indeed, quality is how Disney aims to separate itself from Netflix. While Netflix pumps out massive amounts of content, the quality is often regarded as so-so. By contrast, Disney has a formula for producing blockbuster after blockbuster and is aiming to win over its audience by building trust that each release is worth watching. With franchises such as Marvel, Pixar, and Star Wars, as well as the addition of ESPN+ and Hulu, Disney+ has a promising future.
The strategy seems to be working, at least when viewed through the lens of subscriber count. In the third quarter of 2022, Disney+ surpassed Netflix subscriber figures and retained the top spot in the fourth quarter of 2022.
As the company moves into 2023 and beyond, it can focus more on profitability than top line sales. Disney+ has raised its prices and introduced ad-supported plans to expand its streaming service.
Disney Parks: Soaring Revenue
Disney Parks have proven to be a steady source of revenue for the company. The segment’s revenue saw a 36% year-over-year increase, totaling $12.7 billion, and operating income rose by more than 100% to $1.5 billion.
Nevertheless, the recent challenges faced by the company have led to necessary restructuring efforts focused on maximizing profits in the long-term. While these efforts may have come at a cost, this year may present opportunities for increased earnings.
A Compelling Buy
The past few years have been a test for Disney, with pandemic-related closures significantly impacting the company’s earnings from movie theaters, theme parks, and cruises. In addition, concerns were rife that the company invested too heavily in its streaming service amid a bear market.
Management has been transparent about its focus on Disney+, noting that it has reached peak losses, and the company is now focused on profitability over the next two years, which could serve as a major catalyst for Disney share price if successful.
The return of Bob Iger as CEO is a notable positive. Iger’s leadership has been instrumental in turning Disney into a $257 billion powerhouse, and the stock is currently trading at a historically low price-to-earnings ratio.
Buy Before Disney Stock Pops
Disney has a history of weathering market downturns and bouncing back quickly. During the Great Recession, the company’s stock dropped over 55% before surging more than 110%. The consensus among analysts is that a similar pattern may occur following the current bear market.
Given Disney’s strong portfolio of intellectual property, growth potential, and current “bargain share price”, the odds are that shares will not remain near the $100 level for long.
On a discounted cash flow forecast basis, we see upside to $135.86 per share, suggesting north of 30% returns on the table.