Disney stock fell 2.1% on Friday and hit a new 52-week low of $145.85. The stock is down 18.3% so far in the year and is underperforming the S&P 500 by a wide margin. Why has Disney stock been falling and should you buy or sell the stock now?
Notably, Disney stock was strong last year even as the lockdowns took a toll on its Parks segment. The company had to resort to massive layoffs as the Parks were closed amid the restrictions. The Parks segment plunged into a massive loss last year.
Earlier this month, Disney released its earnings for the fiscal fourth quarter of 2021. The company’s revenues increased 26% in the quarter and reached $18.5 billion. In the full fiscal year, the company’s revenues increased 3% to $67.4 billion. It posted an adjusted EPS of $2.29 in the year as compared to $2.02 in the previous fiscal year. Here it is worth noting that the company had booked a GAAP loss in the last fiscal year, which was its first annual loss in 40 years.
Meanwhile, Disney’s streaming subscriber growth slowed down in the quarter but the company had already forewarned about the near-term slowdown. At the end of the quarter, it had a total of 118.1 million Disney+ subscribers. Its subscribers for ESPN+ were 17.1 million while Hulu had another 43.8 million subscribers. Notably, the average monthly revenue per subscriber for Disney+ fell 9% to $4.12 in the quarter which the company attributed to the higher percentage of the lower-priced Disney+ Hotstar subscriptions. Notably, streaming companies like Disney and Netflix have been testing lower-priced subscriptions services in emerging markets like India.
Higher COVID-19 related costs
During the earnings release, Disney said that it incurred around $1 billion in costs in the fiscal year 2021 related to COVID-19-related expenses. It hasn’t expensed the cost but would instead amortize them over coming years. The company expects to incur such costs this year also even as the timing and quantum are uncertain.
Streaming could be a long-term driver for Disney
Meanwhile, while the streaming subscriber growth for Disney slowed down in the quarter, the company is positive on the long-term growth trajectory. “We continue to manage our DTC business for the long-term, and are confident that our high-quality entertainment and expansion into additional markets worldwide will enable us to further grow our streaming platforms globally,” said Disney CEO Bob Chapek in the prepared remarks.
At the investor’s day in December, the company had outlined aggressive expansion plans for its streaming service. At the event, the company said that it expects Disney+ subscriber numbers to triple by fiscal 2024 to between 230-260 million. After adding the subscribers for Hulu and ESPN+, it expects to have been 300-350 million subscribers by the end of 2024. In the fiscal fourth quarter, the company added only added about 4.1 million net paying subscribers in the quarter. Also, the DTC segment’s operating losses widened to $630 million in the quarter, up from an operating loss of $374 million in the corresponding quarter last year.
Disney stock forecast
Overall, Wall Street analysts have a bullish forecast for Disney stock. It has a median price target of $201 which is a premium of 36% over current prices. The stock’s highest price target is $263 which is a premium of 77.9% over current prices. However, the street low target price of $137 is a discount of 7.3%.
Of the 31 analysts that are covering the stock, 22 rate it a buy or higher, while nine rate it a hold. None of the analysts has a sell rating on the stock.
Meanwhile, after Disney’s earnings release, several brokerages lowered their target prices on the stock. These include JPMorgan Chase, Bank of America, Wolfe Research, Goldman Sachs, and Deutsche Bank.
However, Wells Fargo believes that the sell-off is now overdone and reiterated its overweight rating even as it lowered the target price to $196. “Investor jitters are building as the implied core net add trajectory seems aggressive to some, especially amidst increased focus whether Disney+ has a wide enough content offering to hit its defined TAM. Our view is that the slower-than-expected production ramp is the biggest culprit of the net add slowdown throughout FY21, which we expect to fully abate in F2H22,” said Wells Fargo in its note.
Notably, Disney stock fell in September also when the company said that its subscriber growth in the quarter would be tepid. Back then also, Credit Suisse had said that the steep fall looked overdone.
Should you buy Disney stock
Looking at the valuation, Disney stock trades at a next 12-month (NTM) enterprise value to revenue multiple of 3.9x and an NTM price to earnings multiple of 34.2x. While both these multiples are ahead of their long-term averages, it’s because of the fall in near-term earnings due to the business disruption caused by the COVID-19 pandemic. The stock could see a valuation rerating once the market starts seeing it as a streaming company from a production house.
Streaming companies like Netflix trade at a premium valuation as compared to legacy media companies. Over the longer term, streaming would contribute handsomely to Disney’s earnings.
Meanwhile, the discovery of the new COVID-19 strain is a risk for all reopening plays. Talking of Disney, it’s a play on reopening as well as streaming. In the short term, the news flow over the new strain could lead to volatility in all stocks including Disney. That said, after the recent underperformance, Disney stock looks like a good buy at these prices.