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Is Disney Stock a Deep Value Buy or a Value Trap?

I’m breaking down Disney’s recent performance and evaluating whether it’s stock downfall presents a deep value buy or if it's best to stay away.

Let’s do this!

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The Key Story

The END of Disney Stock?

Disney's Struggles

Disney stock has been a poor investment over the past decade, showing no gains during that time and down 38% over the past five years. Despite beating Q3 2024 earnings expectations and reporting their first profitable quarter in streaming, the stock is still down another 4%. So, what went wrong?

My Worst Investment Ever

Disney is my worst investment ever. I bought most of it during 2020 and 2021 and I'm down -37% overall. Despite this, I’ve held on, believing the stock may yield good returns from here. However, it’s been a tough ride, and I want to share what I got wrong about Disney stock.

Challenges in Traditional Media

The main profit driver for Disney and other traditional media companies has been the cable TV bundle. This segment is declining as the number of cable TV subscribers continues to drop. The shift to streaming, led by Netflix, is replacing this highly profitable business with a high-growth but initially unprofitable one. This transition hit Disney’s earnings hard.

The global pandemic shut down movie theaters and Disney parks, causing significant declines in their business. Although the parks business has returned to all-time highs in profitability, the streaming losses remained a major issue.

Streaming Strategy and Losses

In 2022, Disney followed a growth-at-all-costs strategy in streaming, gaining over 100 million subscribers but with significant losses. Their combined streaming business, including Disney Plus, Hulu, and ESPN Plus, peaked at nearly $1.5 billion in losses in Q4 2022.

Keep Reading For My Thoughts On Disney Stock, Q3 Analysis, Earnings Estimates, Price Targets, etc…

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Bob Iger's Return and Turnaround

Longtime Disney CEO Bob Iger returned to the company to turn things around. In under two years, Disney’s direct-to-consumer streaming losses have gone from -$1.5 billion to a profit in the latest quarter.

Q3 Earnings Highlights

• Revenues: Increased to $23.2 billion, up from $22.3 billion the previous year.

• Diluted EPS: Up to $1.39, from $1.13 the previous year.

• Total Operating Income: Up 19% year-over-year.

• Adjusted EPS: Up 35% year-over-year.

• Entertainment Operating Income: Nearly tripled year-over-year.

The only negative in this report was a slight moderation in demand for their domestic parks.

Entertainment Business and Streaming

Disney’s linear networks are declining, but their direct-to-consumer segment is improving. The streaming business posted a $47 million profit in Q3, one quarter ahead of guidance. As Disney continues to bundle services, raise prices, and reduce churn, streaming profitability should surpass linear networks.

Park Business and Future Growth

The parks business remains a strong profit generator. Although there might be a couple of quarters of flat or slight decline, the focus is on turning the streaming business into a profitable growth engine.

Strategic Shifts

Disney is returning to producing less content and focusing more on quality, rather than focusing on volume. This shift is crucial as it reduces costs and improves the operating results. If Disney can continue this trend, they are on a path to hitting all-time record highs in earnings within the next two years.

Analyst Projections and Price Target

The consensus price target for Disney stock is $140.47, suggesting a 63% upside. The company is projected to have significant earnings growth in the coming years, with non-GAAP EPS expected to be $4.75 in fiscal 2024. This would put Disney at an 18 P/E ratio, with further growth expected through 2028.

Conclusion

Disney’s business is improving significantly, and the stock is currently undervalued. Despite the challenges, I believe Disney is a good value play at the moment. If you are to buy the stock, now is a better time than any in the past decade. I’m holding onto my Disney stock and slowly adding to it while it's at these lows.

Thanks for the read! Let me know what you thought by replying back to this email.

— Zach

Disclaimer: Dividend Dividend (Dividend Data LLC) is not a professional financial service. All materials released from Dividend Data (Dividend Data LLC) are for educational and entertainment purposes. Dividend Data (Dividend Data LLC) is not a replacement for a professional's opinion. Contributors to the Dividend Data (Dividend Data LLC) might have equities mentioned in the newsletter