Where Will Disney Stock Be In 10 Years?

Make no bones about it, Disney (NYSE:DIS) has had a dreadful year. The share price is down 8.3% for the year versus the S&P 500, which has posted a 16.5% gain.

That type of relative underperformance stinks of something ugly lurking under the hood at Disney. Why did investors abandon the stock this year and what does it mean for the future, where will Disney stock be in 10 years?

Why Did Disney Stock Fall?

To figure out where Disney will go, we first look to the past to see where it has been and why it fell. A quick glance at the financials doesn’t easily reveal what has gone wrong.

Sure, the company had a mis-step in 2020 alongside most other businesses tethered to the entertainment world, but over the past 5 years that was the only stumble on the revenue line item.

Revenue was reported at $59.4 billion in 2018 and had grown by 2022 to $82.7 billion. That was a result of 7.8% growth in 2018, 17.1% growth in 2019, a decline of 6.1% in 2020, and a return to more typical growth in 2021 and 2022 of 3.1% and 22.7% respectively.

The first clues as to where problems may lie can be detected from the operating income trend. While revenues on the whole have risen, operating income has fallen from $14.8 billion in 2018 to $6.8 billion in 2022.

The collapse in earnings has been more dramatic, and explains why shareholders have got cold feet. EPS fell from $8.36 per share in 2018 to just $1.75 in 2022.

That kind of precipitous fall makes shareholders queazy, and they didn’t hang around to ask too many questions. Instead, they sold their DIS stock in droves so that the share price now approaches levels not seen since 2014.

That’s right, Disney shares are now trading at levels they last saw almost a decade ago. And that has some value investors sniffing around now and wondering if a deal is on offer.

Will Disney Stock Go Back Up?

To figure out whether Disney shares are undervalued, we conducted a thorough analysis of the company’s financials.

The first thing that surprised us was just how high Disney’s price-to-earnings ratio is at 66.3x. For a company whose share price has underperformed so dramatically, and yet is so well-known, a lofty earnings multiple like that suggests there is continued risk to the downside.

However, to counteract that argument is the firm’s price-to-sales multiple that sits at just 1.7x, a very reasonable figure.

When we compare the two figures it’s clear that the problem Disney has is not its top line revenues but rather its bottom line profits. Something is getting in the way of the company being efficient in dropping top lines sales to profits.

When we examined financial line items for the past 5 years, it appears that operating expenses have soared to $21 billion. In short, Disney is having to spend more to generate sales but it’s not doing so efficiently. 

Until Disney can lower its operating costs while still generating the same sales figures, it is unlikely to be rewarded by investors.

Where Will Disney Shares Be In 10 Years?

Disney has certainly had its fair share of operational challenges and that’s been reflected in its cash flows. Levered free cash flows have fallen over the past five years from $9.8 billion to $1.0 billion, a truly shocking plunge.

In spite of the reduction, however, we calculated fair value for Disney share price to sit at $108 per share. And it seems like we’re in good company. Of the 26 analysts covering Disney, the consensus estimate is for the share price to hit $109.15 per share.

The most optimistic analyst has a $145 target on the share price, and we do think that’s a reasonable forecast for the next 10 years. If we had to answer the question, where will Disney stock be in 10 years? Most likely, Disney shares will be trading at a market capitalization of $264 billion or higher, corresponding to a share price of $145 or above.

Disney Dividend Is On Hold

For investors who believe the Disney brand is strong enough to weather the current storm, and want to hold on for the passive income, you’re out of luck. In 2020, amid the economic turbulence, Disney slashed its dividend altogether to zero.

The idea at the time seemed reasonable. Why pay shareholders a quarterly income when theme parks are closed, cruise ships are not operating, and the viability of the firm as a whole is in jeopardy. 

Fast forward a few years, though, and the failure to resume the dividend signals even to casual observers that the company is in a precarious financial position.

It also means that the demand among shareholders to buy Disney for the income alone has evaporated. With no cushion underneath the stock from them, the short to medium-term trend appears to be flat or down.

Over the longer term, especially when looking out a decade in time, the prospects for Disney are much more promising. CEO Bob Iger has a history and proven track record, after all, of turning around Disney, and only a brave or foolish shareholder would bet against him doing so again.

Wrap-Up

Disney management has done a very respectable job of growing revenues over the past five years, but they have failed to translate top line growth into bottom line growth. Worse still, profitability has gone backwards while sales have risen, suggesting significant operational challenges have hindered progress.

With no dividend to speak of and earnings per share continuing to fall, resulting in a sky high P/E multiple, value and income-oriented investors are struggling to get behind the company just yet.

However, the outlook for Disney is very positive over the next decade with CEO Bob Iger enacting a turnaround plan that is likely to change the firm’s fortunes, even if they don’t make waves short-term.

Turning around a giant like Disney takes time much like turning around an ocean liner – it simply doesn’t happen quickly, but once it’s made a U-turn it can get up to full speed and make a lot of progress quickly.

In the case of Disney, that should result in growing earnings, a lower price-to-earnings multiple, and an enticing buy for value investors.

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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.