Is Disney Stock Undervalued?

Golly, what to make of Disney. On the one hand, Disney (NYSE:DIS) has the brand and revenue diversification most any company would envy.

On the other, it has had a dreadful second half of the year, down 13% year-to-date, and is weighed down by a slew of issues that we’ll address.

Let’s talk about the good, bad and ugly as it relates to CEO Bob Iger’s firm.

Why Is Disney Share Price Down?

To begin, Disney share price has had a pretty woeful six months and one obvious reason why is the slowing pace of revenue growth.

Through most of 2021 and 2022, quarterly YoY growth eclipsed 20% but in 2023 that has slowed meaningfully. In the past four quarters alone, Iger reported revenue growth of 8.7%, 7.8%, 13.3%, and 3.8% respectively.

Such a rapid slowdown following a few years of impressive top line numbers has investors worried but perhaps the concerns are overblown. After all, the slower pace at which revenues are growing hasn’t translated to lower operating income.

Quite the opposite, in fact. EBIT, or operating income, has climbed above $2 billion in three of the last four quarters, a feat not matched in any of the previous three years.

Further examination of the financials reveals a healthy $11.5 billion in cash on the balance sheet and the lowest long-term debt level of the past 12 quarters.

Lots of Reasons to Like Disney

The attractive balance sheet and solid operating income aren’t the only reasons to like Disney. Its highly diverse revenue streams are another. From theme parks to media networks, and from studio entertainment to cruise ships, Disney has wide and varied sources of revenue.

It also has an almost unparalleled brand advantage. The Disney brand was reportedly worth $49.5 billion in 2023. To give you an idea of how lofty that number is, the entire market capitalization of Disney is $155 billion so literally a third of its entire worth is attributed to its brand.

It also has proven with its Disney+ offering to have a legitimate competitor to Netflix. But it’s not all roses and rainbows at the Disney castle. Those subscriber numbers have fallen substantially over the past few quarters, from a peak of 164 million in Q2 2022 to a most recent quarterly figure of 146 million.

Declining subscriber numbers each and every quarter has indeed spooked investors and triggered them to run for the hills over the past few quarters. Nonetheless, there comes a time when even the bad news has been priced in and the metrics start to look attractive. So, is Disney at that level now?

Time To Buy The Dip?

The billion dollar question for investors is whether Disney stock is undervalued? Among 29 analysts, the consensus fair value for Disney is $105.89 per share, which would imply that Disney is undervalued with 28.7% upside. 

We ran a discounted cash flow forecast analysis to verify whether the future value of cash flows discounted to the present day were in alignment with Wall Street and concluded that, indeed, the stock is on sale. A DCF reveals intrinsic value sits at $108 per share, implying almost 30% upside from present levels.

After examining the financials, it is clear that management has made a concerted effort to improve profitability and boost levered free cash flows. Over the past 3 years, we uncovered three of the highest four quarters for levered free cash flow occurred in the past fiscal year. 

So while the headline news will pit Disney against DeSantis, and point out the pitfalls of the Disney brand, whether slowing revenue growth or struggling subscriber figures for Disney+, the financial sttatements are increasingly looking better.

It would be a risky proposition to bet against Iger, who, after all, led the company from strength to strength in the past and likely needs a runway to repeat his former successes. No doubt, the share price is not reflecting the improved financials, but the odds are they will soon.

Disney Chart at Key Level

Disney’s stock chart offers an insight to how crucial the present level is for shareholders. You can see below the descending resistance line is almost hitting the long-term support line. That’s a sign that the Disney price action has increasingly become compressed and is on the cusp of a breakout.

A break above the key resistance line would signal Disney shares have the potential to move significantly higher over the coming weeks and months.

One thing in favor of that happening is a really positive seasonal trend. Over the coming 13 weeks, Disney has historically risen by 7.14% based on 51 years of data.

And while the stock doesn’t always rise in Q4, it tends to do so in 2 out of every 3 years on average over that duration, so when you combine the bullish and bearish years together the average upswing is a very noteworthy 7+%.

Final Thoughts

Is Disney stock undervalued? Analysts and a discounted cash flow forecast both align that Disney is undervalued with the potential to rise by as much as 30%.

It must be noted, however, that the company’s price-to-earnings ratio currently sits at 68.9x, which is exceptionally high and alone would suggest the share price is not a bargain.

Still, it’s clear that management has made a concerted and successful effort to boost operating income and bottom line profitability, and the forecasts for its lagging Disney+ offering are for it to turn profitable next year.

On a technical basis, the key resistance line now is converging on a crucial support line. Should DIS share price break above that resistance line, shareholders could expect the stock to run higher, at least to fair value around $105-$108 per share, and possibly much further. 

Disney is a good example now of a stock that requires investors to climb a wall of worry to get over the hump to buy but if they do the odds likely favor them now in the long-term.

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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.