Is Disney Stock Overvalued?

Walt Disney Co (NYSE:DIS) has some of the most rabid fans on the planet, and the House of Mouse was riding a high heading into the coronavirus pandemic.

Baby Yoda (not his real name) and the Mandalorian had everyone buzzing about the Disney+ streaming service. Marvel and Star Wars alone were raking in profits with hit after hit in the 2010s. Shares reached an all-time high of $153.41 before the global lockdowns, and it’s struggling to recover in a new world.

This has many analysts wondering – is Disney stock overvalued?

Movie theaters were devastated by the pandemic, and Regal movie theaters announced it was closing its 7,000 screens around the country due to delays of high-profile Hollywood projects.

The total global box office receipts in 2020 were $42.5 billion but every studio is scrambling as cinema revenues dropped 66 percent in 2020. That doesn’t even account for Disney’s parks and resorts, which have been slow to reopen in California and Florida.  

To understand if Disney can maintain profits as the economy heads for turbulence in 2021, this guide will analyze the company’s business model, future potential, and financials both before and after the pandemic.

Why Disney Stock Went Up

Disney’s revenue is relying heavily on its digital streaming options, with Disney+, Hulu, and ESPN bundles being heavily promoted through the year.

The company’s acquisition of Fox added Freeform, FX, and National Geographic to the stable, along with The Simpsons and other parts of the company’s Animation Domination lineup.

And despite theme parks closing, Disney still kept the buzz going by releasing DIY versions of some of the most iconic flavors from the destinations.

Although revenue plunged, many analysts remain bullish on the company simply because of the IP that it owns. Of course, things haven’t been all fun and games, and Disney has been fighting a lot of competition to stay on top in 2020.

It came with a lot of controversy, especially surrounding the release of the live-action remakes of The Little Mermaid and Mulan.

Mulan generated controversy in the U.S. for its transphobic nature, while star Liu Yifei also generated controversy as a supporter of the Hong Kong police during 2019 mass protests.

The film was also shot in a province in which millions of Uighur Muslims were forced into internment camps. This all comes on the heels of backlash already forming about the studio changing properties like The Avengers and Star Wars.

This led to Disney reporting losses by the end of 2020. Let’s dive into its financials next.

Disney Financials Have Worsened

Disney’s most recent quarterly report was for its 3rd quarter of the fiscal year 2020, or the period ending June 27, 2020.

The company lost $4.5 billion during this quarter, compared to $2 billion in profits for the same quarter in 2019.

This is largely contributed to the complete shutdown of is parks, cruises, and other experiences. Merchandise licensing was also hit hard, as retailers around the country are also struggling.

The parks segment alone dipped 85 percent from the previous year, posting only $983 million in revenue. Operating costs pushed it down into a $2 billion operating loss on the books that put a drag on the other market segments.

Its studio entertainment division brought in $1.7 billion in revenue, which was down over 50 percent. Much of this is because of production and filming delays as Hollywood shut down across the board.

Disney earned $4 billion from streaming revenue, which accounted for 30 percent of the total. This is 2.4 percent growth from the previous year and happened despite professional sports leagues shutting down, leaving even ESPN with programming gaps. This has some wondering if Disney is valued too high.

Is Disney Valuation Too High?

DIS is trading between $120 and $140 in the back half of 2020, and the stock has been unstable all year.

This is largely due to inconsistencies in when different cities open theaters, parks, and other public places in which Disney has a massive stake. It’s also heavily invested in streaming, owning the majority share of Hulu, which will certainly be at the center of the restructuring of streaming services.

The company even halted its dividend payouts in 2020, and there’s good reason.

The competition is fierce – Apple, Comcast, Netflix, Amazon, Sony, Google, and Facebook all have horses in the race, and there is some great IP competing with Disney’s well-known cast. It still boasts 57.5 million paid Disney+ subscribers, even if most are likely getting heavy discounts on their service.

And there are still upstarts like Quibi to consider. Run by former Disney chief Jeffrey Katzenberg, it can either serve as a competitor or (more likely) cautionary tale.

Here are factors that could make Disney stock drop.

Will Disney Stock Drop?

The entire economy is unstable heading into 2021, and the drop in stimulus funding will certainly correlate with a drop in paying subscribers for some unneeded services. But for Disney, this is likely to be a good thing, because it offers cable-cutting alternatives that give the company a direct line to its most passionate consumer base.

Licensing deals for Marvel, Star Wars, and Disney character stables will still generate revenue, even if not as much as before.

Disney’s production pipeline also has a lot of heavy hitters it already paid for much of the production costs for and can release to generate revenue. While the stock may drop, the biggest concern is it simply remaining stagnant instead of growing.

It’s all going to depend on how quickly tourism and travel rebounds, as the company will surely take a hit this holiday season.

Is Disney Stock Overvalued? The Bottom Line

Disney stock is already feeling the effects of a wide range of problems caused by the coronavirus. Its theme parks and cruises were forced to close for most of 2020, as did its productions.

The company is straining to finish production on projects like Black Widow and WandaVision, push out fall TV content for its networks, cover delayed sporting events, and finding release dates for projects with theaters closed.

It’s far from the happiest place on Earth right now, but this could provide a discounted opportunity for investors. These may be the toughest times Disney ever faced, but if everyone just closes their eyes and believes…

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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.