Why is Disney Stock so Cheap?

Don’t sell on streaming losses after park revenue soared 73%.

Andrew Willis 29 September, 2023 | 4:18AM
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Key Takeaways for Disney Stock

  • Disney+ lost subscribers with a price increase but there were fewer defectors than expected
  • TV advertising and studio losses have been offset by streaming revenue and a rise in park admissions
  • Disney’s direct-to-consumer streaming segment should be profitable by 2025

 

Andrew Willis: Remember when empty parks at Disney (DIS) during the pandemic were a reason to sell the stock? Now parks are an asset as admissions improve, helping to offset losses in traditional TV advertising and a declining studio business.

Disney is evolving and adapting well, so why are people still selling the stock?  

Perhaps sellers of Disney stock today underestimate how much Disney magic now exists outside of the movie theatre and in parks and living rooms instead. Consider the rebound Disney parks has made, with revenue up 73% last year, and an expected gain of 5% each year for the next five years. And yes, there were defections from streaming service Disney+ after a price increase, but numbers were lower than expected. Senior equity analyst Neil Macker also still expects 12% average annual growth in Disney’s direct-to-consumer products like Disney+ and Hulu, with positive operating income expected by 2025.

Disney+ Streaming Losses Should Turn to Gains

We do project advertising revenue from traditional networks to fall over the next five years, but investors shouldn’t be entirely surprised to see the decline of cable TV. Meanwhile, streaming viewership might just pick up once summer’s over.    

For Morningstar, I’m Andrew Willis.

bulls Disney Bulls Say

  • The parks and resorts segment will rebound strongly from the pandemic as families still view the parks as a prime vacation destination.
  • Disney+ has a long runway for growth available in both the U.S. and internationally. The firm’s original series and the deep and constantly expanding library will drive the growth.
  • Although making movies is a hit-or-miss business, Disney's popular franchises and characters reduce this volatility over time. Additionally, the firm’s annual slate does not generally rely one big picture, reducing the downside from a flop.

bears Disney Bears Say

  • The business model for the media networks division depends on the continued growth of affiliate fees. Any slowdown in the growth of these fees, as pay television subscribers continue to decline, could tremendously hit profitability.
  • The streaming space is becoming increasingly crowded. Disney may need to continue to fund losses at this segment beyond fiscal 2024.
  • Developing mass-market hit programs can be unpredictable, especially as media fragmentation continues. The race to attract and retain talented creatives has been and will remain very competitive and expensive.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
The Walt Disney Co101.76 USD1.09Rating

About Author

Andrew Willis

Andrew Willis  is Senior Editor at Morningstar Canada. He previously produced content for Fidelity Investments and finance industry events for Euromoney Institutional Investor and has written in the past for Thomson Reuters and CNN. Follow him on Twitter @Andrew_M_Willis.

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