Will Disney Stock Recover? Entertainment giant Disney (NYSE:DIS) has fallen considerably this year as stocks have sold off and investors have grown more pessimistic about future growth. While the news hasn’t been good for Disney, a blue-chip giant of its sort selling off can create opportunities for value investors.
How Far Has Disney Fallen? YTD, Disney has lost 30.5 percent of its value. The number over the last 12 months is slightly grimmer yet, with the stock off by 36.6 percent. Recently, Disney stock has been trading at price levels not seen since the crash of 2020.
Why Is Disney Down So Much?
Disney’s immediate problems are largely the result of lackluster earnings.
For the quarter ending on March 31st, Disney earned just $0.26 per share. This was down nearly 47 percent from the same quarter in 2021.
Full-year metrics were even worse, with the 12 months ending on March 31st resulting in earnings of just $1.45 per share. This was a decline of more than 150 percent from the previous year.
These falling earnings have caused investors to radically rethink the company’s value and growth prospects. Note that these earnings are on a non-adjusted basis.
Disney is also highly correlated to overall consumer spending, as it is heavily dependent on discretionary spending on entertainment for its revenues. As a result, inflationary pressures and recession fears, both of which negatively affect consumer spending, weigh heavily on Disney’s stock.
If the US tips into a recession in the second quarter, Disney’s downward slide would likely continue more or less in line with the decrease in spending on non-essentials.
An additional concern comes from Disney’s heavy exposure to the Chinese market.
Due to China’s zero-COVID strategy, the company’s parks in Shanghai and Hong Kong have faced intermittent closures long after domestic parks reopened. The lingering effects of the pandemic have also weighed on the domestic parks, with fewer international visitors traveling to Disney’s attractions in the United States.
Finally, Disney is facing political pressures from across the spectrum. In Florida, the company has found itself in disputes over civil rights issues with the state government.
Activist investors have also called upon Disney to commit to a firmer stance on Uighur rights in the Xinjiang province of China.
While relatively minor when compared to earnings and macroeconomic conditions, such issues can have slightly negative impacts on stocks that are already facing headwinds.
Can Disney Recover?
Despite some obvious challenges, there are still bright spots for Disney.
In the most recent quarter, Disney+ subscriptions beat analyst expectations, climbing to 137.7 million against an estimate of 135 million.
Average revenue per user also rose 5 percent. This suggests that the company’s streaming service still has growth momentum behind it, even as other parts of the business are lagging.
Revenues are also moving in a much more positive direction than earnings at the moment.
In the most recent quarter, revenue jumped 23.3 percent YoY to $19.3 billion. Full-year revenue was also up 31.3 percent at $76.6 billion. The fact that revenues are still growing demonstrates that Disney still has steam behind it and is by no means reaching the end of its long-term growth trend.
Disney also has a large moat thanks to its enormous portfolio of intellectual properties.
With the Disney+ service, it can monetize all of these properties to the fullest while challenging embattled streaming services like Netflix for market share. As the most recent numbers show, Disney’s streaming services are growing nicely and outperforming analyst expectations.
It’s also worth noting that Disney is a blue-chip giant that has weathered difficult times before.
In Q2 2009, the recession that followed the 2008 financial crisis caused the company’s net income to drop by 46 percent. The same year, shares briefly dipped below $20.
As we all know, however, the company eventually came roaring back, driving share prices to nearly $150 just before the pandemic began.
While the past is obviously no guarantee of the future, Disney has historically had a knack for bouncing back after challenging times.
Taking all of this into consideration, it’s fairly obvious that Disney can recover. The question, of course, is what will spur that recovery?
Easing of inflationary pressures would likely help Disney by encouraging consumer spending. A permanent reopening of the Chinese economy from rolling lockdowns would also be extremely helpful for Disney, though this may not happen for quite some time.
Is Disney Undervalued Now?
Another question for investors has to do with Disney’s valuation. With a P/E ratio of 24.4, the stock isn’t exactly cheap. This ratio is well above the company’s historic level.
During the pandemic years, P/E ratios briefly spiked to over 200, reflecting the challenges of the time. This ratio is falling rapidly back toward a saner level as the price corrects. If the company improves its earnings in the coming quarters, we could see the company return to a reasonable value range.
Given the selloff, it seems likely that Disney is more or less fairly valued.
Economic reopening and the growth of its streaming services should support better earnings going forward. Though there are definitely risks, Disney looks like a decent and reasonably safe value in today’s highly volatile market.
Is Disney a Buy?
Overall, Disney is likely to recover much of its lost ground and reward investors. That process, however, could be a long one. The company’s compound macroeconomic and political problems could weigh on it for some time to come, and there’s little telling when and how they will resolve.
For long-term investors, Disney could be a decent buy at the current depressed pricing. Few companies have been as successful as Disney, and its intellectual properties are still immensely valuable.
With parks reopening, the worst is probably behind the entertainment giant. The company likely won’t fare so well in the short term, but investors who buy and hold have a good chance of being rewarded with solid returns a few years down the line.
In today’s market, Disney also has the advantage of being a somewhat less risky alternative to the high-growth tech stocks that have taken the worst of the stock selloff this year.
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