Disney Stock (NYSE:DIS)
Since my previous update, investors in The Walt Disney Company (NYSE:DIS) have witnessed DIS dramatically underperform the S&P 500. As Disney stock hit unfavorable levels, I reduced my rating. The AI enthusiasm has also boosted the Technology sector against the market, while the Communications sector strives to rebound through sector leaders such as Google (NASDAQ:GOOGL) and Meta Platforms (NASDAQ:META), which are also affected by the AI excitement.
However, entertainment-focused stocks like DIS have outperformed SVOD leader Netflix (NASDAQ:NFLX), which bottomed out last year (as I mentioned). NFLX has progressively recovered from its lows in May-July 2022, rebounding more than 150% to this week’s highs.
Despite the return of famous CEO Bob Iger, DIS is still struggling near its December 2022 lows, as the early enthusiasm for Iger’s return has worn off.
But why is this so? Isn’t Iger meant to restore Disney Magic to the Mouse House
Iger’s surprising participation at Apple’s (NASDAQ:AAPL) WWDC this week boosted buying enthusiasm in the stock. Keen investors should be aware that Disney has formed a relationship with Apple to put Disney+ in the company’s newly announced mixed reality device from “day one.” Vision Pro, the Cupertino company’s take on mixed reality, has garnered positive feedback. However, the device is not projected to ship until 2024, so no immediate impact on Disney’s direct-to-consumer (DTC) operating performance is predicted.
I believe that dip buyers have returned to DIS in the last two weeks, possibly finding an appealing opportunity in the stock, comparable to the December support zones.
However, I concluded that investors are justified in battering DIS into its current lows, considering its May earnings scorecard’s very lackluster earnings. It highlighted that the corporation must choose between growth and profitability.
While Iger and his team are eager to achieve a balance on these crucial DTC indicators, I believe the execution has been insufficient to offset the long-term deterioration in its Linear TV segment.
Furthermore, the execution concerns associated with Comcast’s (NASDAQ:CMCSA) stake in Hulu may cause another hangover for DIS investors this year. Iger regards Hulu as having potential since he disclosed Disney’s ambitions to merge Hulu with Disney+ for US subscribers. However, it is unclear at what price Comcast would be ready to unload Hulu, which is “valued no lower than $27.5 billion.” According to Morningstar, Disney is unlikely to “be willing to pay any price for the Comcast stake.” As a result, with Iger presumably banking Disney+’s future on the successful settlement of the stake beginning next year, investors must factor in an appropriate discount, given the anticipated difficulties.
I concluded that Disney’s large debt load from the Fox acquisition could not be expected to stymie a comeback in its medium-term profitability. Disney’s DTC division is predicted to report operational profit (on an annualized basis) in FY25 (the year ending September 2025), according to consensus projections.
As a result, investors purchasing at current levels must closely monitor advances in its DTC recovery, as its SOTP valuation strategy is based mostly on its media component. As a result, if DTC can maintain its upward profit trajectory, it should help reduce near-term pressures in its Linear TV division. Furthermore, if economic circumstances improve faster than predicted, advertising income and affiliate fees could bottom out this year, boosting free cash flow (FCF) during the next two fiscal years.
Analysts anticipate that Disney’s FCF will be $3.83 billion in FY23, rising to $10.35 billion by FY25. As a result, Disney’s FCF, which reached $9.83 billion in FY18, should recover to pre-pandemic levels.
As a result, investors interested in participating in DIS at current levels must have faith in Iger and his team’s execution as Disney reorganizes its DTC to support its profitability growth rebound.
DIS has returned to its December lows but has been supported by dip buyers during the last two weeks.
However, it must demonstrate its capacity to maintain profitability.
As a result of the optimism in its DTC area, Disney stock is rated for growth. Morningstar also said that Disney’s “direct-to-consumer efforts, including Disney+, Hotstar, Hulu, and ESPN+, are taking over as the drivers of long-term growth.”
Nonetheless, I see the current levels as positive, since the purchasing mood has strengthened following the pounding since the February highs.
Featured Image: Unsplash @ Tyler Nix
