Disney (DIS) stock has whipsawed in 2024, and is now trading at multi-month lows. DIS was the top gainer in the Dow Jones Industrial Average ($DOWI) until about mid-April, but has since pared its gains, and is now among the worst-performing constituents of the price-weighted index.
Disney stock has been plagued by perennial underperformance, which is frustrating for long-term investors and bulls like myself. For instance, while the stock somehow managed a 4% gain last year, its returns have trailed that of the S&P 500 Index ($SPX) by a massive 19 percentage points over the course of 2024.
Last year, DIS fell to its lowest level since 2014, and the stock is in the red over the last 1-year, 2-year, 3-year, 5-year, and 10-year periods. The underperformance provided a fertile ground for activist investors, but CEO Bob Iger managed to get enough shareholder support to retain control.
Notably, Disney brought back Iger in Q4 2022, and markets initially gave a warm reception to the company’s former CEO by sending shares north. However, the shares have since fallen below the levels where they were trading before Iger’s return. In this article, we’ll discuss why Disney stock is dropping, and whether the worst is over for the entertainment giant.
Why is Disney Stock Dropping?
Disney’s 2024 woes began in May, after it missed consensus revenue estimates for fiscal Q2 2024 and issued soft guidance for Q3. While the company went on to report better-than-expected Q3 earnings earlier this month, and its combined streaming business (finally) churned out a profit, management’s comments on the Experiences segment – which among others includes the hugely popular and profitable theme parks – led to the sell-off in DIS stock. The company noted a slowdown in that segment’s demand in Q3, and sees the “moderation” in its domestic business persisting over the “next few quarters.”
While Disney’s streaming business has turned around remarkably well and is now generating operating profits, versus a peak quarterly loss of nearly $1.5 billion, its Parks segment is the latest worry.
Disney blamed everything from the Olympics and China’s sluggish economy for the slowdown, and said that while high-income customers have of late preferred to travel internationally, those falling into the lower-income bracket are financially strained due to high inflation.
More recently, while Disney announced some exciting park expansions at the D 23 Expo, these failed to cut any ice with the markets. Notably, the company has committed to invest a cool $60 billion in its parks over the next decade as it tries to maintain its lead over competitors.
DIS Stock Forecast
Wall Street analysts are quite bullish on Disney stock, despite its dismal price action. The stock has a consensus rating of “Strong Buy,” while its mean target price of $119.43 is almost 39% higher than yesterday’s closing prices. The stock even trades below its Street-low target price of $100, while the Street-high target price of $140 represents an upside potential of about 63%.
Is the Worst Over for Disney Stock?
Disney’s forecast for the Experiences segment during the Q3 call did come as a dampener, given the lopsided contribution this segment makes to its earnings. The segment accounted for over 63% of Disney’s operating income in the first nine months of the current fiscal year, while the revenue contribution was below 38%.
In percentage terms, the Entertainment segment’s contribution to Disney’s earnings has come down over the last year, but that’s more because of the improvement in the streaming business which has now started positively adding to the bottom line instead of dragging it down.
That said, I believe the worst is over for Disney stock, and the risk-reward looks quite attractive at a next 12-month (NTM) price-to-earnings (PE) multiple of 16.7x. The valuation multiples are not only below what Disney has historically traded at, they're also lower than an average S&P 500 Index constituent.
Disney’s Transformation is Showing Results
Contrary to the price action, Disney’s transformation under Iger is showing results, and its earnings have risen considerably since he took over. The forecasted short-term weakness in the Experiences segment notwithstanding, Disney’s earnings are expected to grow at a brisk pace in the coming quarters.
Disney expects its streaming business to eventually post double-digit margins like Netflix (NFLX), and has followed its rival in launching an ad-supported tier and cracking down on password sharing.
Disney is going back to the basics - which is entertaining people and creating “magic.” The company is now putting intense focus on its movies, and is prioritizing quality over quantity. Its “Inside Out 2” is not only the most successful movie at the box office this year, it's also the fourth most successful animated movie ever.
The importance of Disney’s box office success cannot be understated, and goes way beyond the box office contributions to its earnings. The company has created some very iconic characters that have helped build an aura around its brand. Successful movies – especially the animated ones – also lead to more people wanting to come to Disney’s parks. No wonder, then, that the company is adding new expansions around its “Avatar,” “Marvel,” and “Cars” franchises at the parks. Entertaining movies also add to the value proposition of Disney's streaming business by adding to the content slate. The box office success of Disney’s movies also improves market sentiment and eventually reflects in the company’s valuation multiples.
Overall, I believe that Disney stock is an attractive buy at these prices, and should deliver strong market-beating returns over the next couple of years.
On the date of publication, Mohit Oberoi had a position in: DIS . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
