Why Billionaires Are Buying Disney

Disney (NYSE:DIS) has been a solid long-term stock to hold for decades. The entertainment giant, however, fell flat on performance during and after the healthcare scare early this decade, resulting in significant share price declines.

So, is big money buying Disney? Yes, big money investors like Jim Simons, Ken Griffin and Ken Fisher are all prominent owners of Disney shares.

Why do these billionaires love Disney, and is the stock still worth adding to a portfolio today?

Disney’s Natural Competitive Advantage

The most obvious answer as to why billionaire investors have been scooping up Disney shares is the company’s nearly unbeatable competitive moat.

While entertainment upstarts like Netflix are rapidly producing new content, Disney boats an enormous slate of movies, television shows and other intellectual properties built up over decades and a nearly unparalleled production studio for new creative projects.

For a sense of just how meaningful this advantage is, consider that Disney’s intellectual property assets alone are valued at about $20 billion.

Paramount, another major entertainment company with a long production history, has a total market capitalization of just over $13 billion. In other words, Disney’s IP value alone dwarfs the total value of one of the other major players in its market.

After topping out at over $180 in 2021, Disney shares corrected sharply downward in 2022 and 2023, ultimately giving up more than half of the company’s peak valuation.

During the first wave of lockdowns, earnings retreated briefly into negative territory. Investors who were willing to buy and hold, though, saw a long-term future in which Disney would return to generating solid profits and share prices would rise. The company achieved positive earnings again in mid-2021, though at a much lower level than before the pandemic.

Performance Is Looking Up

Recently, Disney has also seen a string of successes as it attempts to return to solid profitability and resume its long-term growth.

In Q4, for instance, Disney’s earnings per share rose from $0.70 in the year-ago period to a much-improved $1.04. While quarterly revenues remained largely flat at about $23.5 billion, the yearly total for 2023 was a record of $88.9 billion.

Earnings could also receive a tailwind in the near future as Disney takes steps to make its Disney+ streaming service actively profitable. Management is planning around $2 billion in budget cuts atop more than $5 billion of so-called “fat” it has already trimmed.

In time, these steps to increase efficiency could result in higher earnings and share prices. The 5-year outlook for compounded earnings growth for Disney is over 15%, pointing to what could be a strong period ahead for the company.

Disney’s Still Looks Like a Fair Value

Although the stock isn’t as undervalued as it was a year ago, Disney shares still appear to offer a decent value proposition for investors.

Disney trades at 24.6x forward earnings, only slightly above the S&P 500 average of 24.3. Taking Disney’s recent performance and the overall quality of its business into account, this small premium to the broader market looks quite reasonable.

This fair valuation is also supported by Disney’s price-to-sales ratio of 2.3x, which is somewhat lower than its average multiple last decade. As such, there may still be value to be had in Disney as the company continues its return to a normal business operating environment.

Trusted Leader at the Helm

In addition to Disney’s improving performance and competitive moat, it’s also worth noting the effect of a trusted, proven CEO on investors’ perception of the stock.

Bob Iger, often reputed to be the most successful CEO in Disney’s recent history, returned to help turn the company around. The presence of an experienced hand at the wheel has helped to bolster investor confidence.

Even though Iger announced late last year that his term as CEO will end with the expiration of his current contract, that will still put him at the head of Disney through 2026.

Given Disney’s current trajectory under his leadership, this will likely give Iger time to complete the company’s turnaround, restore long-term investor confidence and create a succession plan for guiding the company into the future.

Disney Is Doing Better, But It’s Not Out of the Woods

Even though institutional investors are clearly bullish on Disney, it’s still important for investors looking at the stock to understand the company’s risk profile.

Arguably the biggest concern for Disney shareholders is its ongoing lackluster performances at the box office. In 2023, the company generated about $1.9 billion in US and Canada box office revenue, down roughly 2% from the previous year.

This, however, pales in comparison to the box office numbers Disney was reporting just a few years ago. In 2019, for example, the company reported $3.8 billion at the box office. With the company’s films bringing in revenues equivalent to the mid-2010s, Disney will clearly need to improve the performance of its releases in order to fully regain its edge.

In many ways, these performance metrics speak to a deeper problem at Disney, which is the fact that the company appears to have fallen into a creative rut. This is particularly true of the company’s animated films, which have seen tepid audience response in recent years.

Though Disney’s portfolio of existing intellectual properties gives it an unquestionable moat, this advantage could weaken if the company fails to produce engaging new content over a long enough time frame.

Disney also continues to struggle with an outdated and stagnant linear TV business that is rapidly losing revenue. In the most recent quarterly report, for example, revenue from this business line dropped 12% year-over-year to $2.8 billion.

It should be noted that this segment is a prime candidate for the budget cuts the company is continuing to explore. Bob Iger has, however, said that is not considering selling the company’s traditional TV holdings. This statement was a reversal on Iger’s part, as he had previously looked at the possibility of liquidating assets in the struggling TV segment.

Is Disney Still a Buy?

At the moment, Disney still looks to be a decent buy. Though the stock’s price has risen over the last year, it’s difficult to argue that it’s overvalued. Moreover, the continued business improvements at Disney appear to be setting the stage for future earnings growth that could drive share prices higher.

Although the company does face its share of risks, its performance over the last year suggests that it’s at least back on the right trajectory. Disney may be a moderate, conservative buy, but for investors with long time horizons, it could prove to be a very solid long-term hold.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.