Our previous analysis of The Walt Disney Company (NYSE:DIS) was almost 9 months ago. At that time, we rated the stock as hold/neutral and believed that the stock would likely reach $80. However, Disney was more profitable before the introduction of Disney+ and had a higher sales multiple pre-COVID-19. Therefore, we believe the stock will go lower based on that. The $80 mark has historically been an important support level and has held during both the COVID-19 lows and the 2014 lows. While the stock came close to breaching this level in the recent drop, it did not quite break through. We anticipate that the $80 level will be tested and likely surpassed. We see no issues with the stock trading at a price-to-earnings ratio of 12-14, especially considering the current high risk-free interest rates and the success of Disney+. We recommend looking to buy the stock at a price below $80.
The Q4-2023 results, the longer-term strategy, and the current valuation have prompted us to update our analysis. In the fourth quarter, Disney missed revenue estimates slightly but exceeded non-GAAP EPS estimates, which caused the stock to surge. The company also generated $3.4 billion in free cash flow, which is significantly higher than the previous year. Looking ahead, Disney expects even greater growth next year. However, this growth will primarily come from international subscribers, as domestic growth has been modest. The company’s average revenue per user (ARPU) has increased due to pricing and advertising, which has helped offset losses in the Direct To Consumer segment. Disney’s focus has shifted to profitability and free cash flow, and its streaming business is expected to be profitable by Q4-2024.
Despite these positive developments, there are two issues affecting the stock. Firstly, Disney’s valuations were extremely high, and a correction was necessary. Secondly, analysts had overly optimistic expectations for the company, and even with the recent turnaround, earnings estimates continue to decline. Expectations for Disney to achieve 20% earnings growth over the next four years are still high, despite modest sales growth. Therefore, there is a risk that Disney may disappoint investors.
Currently, Disney is undervalued compared to its historical performance, with a price-to-sales multiple of under 2.0X. However, with risk-free rates approaching 5%, there may be further valuation compression. A price-to-earnings multiple of 12-14 seems reasonable in this environment. We remain optimistic about the long-term strength of the franchise, but it may be more prudent to consider other investment options, such as investment grade bonds with lower risk. We reiterate a hold rating and suggest waiting for further developments before making a decision. Please note that this analysis is not financial advice and investors should conduct their own research and consult with a professional.
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