Source: PaxForex Premium Analytics Portal, Fundamental Insight
Walt Disney remains a relative underperformer in the market, with its stock showing a decline in 2023. This stands in stark contrast to the overall market trend which has experienced positive momentum this year.
However, it's important not to be overly discouraged by Disney's stock performance graph. The company's operational performance is proving to be more resilient than pessimists might believe. Several factors exist that could potentially steer Disney's fortunes back in a positive direction.
In light of these considerations, it's worth delving deeper into the reasons why investors seeking undervalued opportunities might find it advantageous to contemplate the addition of Disney to their investment portfolio at this juncture.
- The Disney+ Revival Surpasses Initial Expectations
In early 2021, Disney's stock hit record highs, surpassing $200, driven by excitement for the rapid growth of Disney+ subscribers. However, this success paradoxically contributed to a subsequent stock decline by over fifty percent. Despite initial losses, the direct-to-consumer segment, led by Disney+, has begun reversing its negative trend, with operating deficits contracting to $2.2 billion in the first nine months of fiscal 2023. Disney aims to turn this segment profitable by next year.
CEO Bob Iger's plan to achieve $5.5 billion in annual savings hinges on cost controls at Disney+. Recently, Disney revised this goal to "exceed" initial expense reduction targets. Price hikes are also on the horizon in October for ESPN+, Hulu (ad-free), and Disney+, while the ad-supported tier of Disney+ expands globally in November. These actions reflect Disney's thriving performance on multiple fronts.
- Disney's Cinematic Resilience Persists
Despite facing a few setbacks in its movie studios over the past years, Disney remains a dominant player in the film industry. Impressively, the company lays claim to four out of the top 10 highest-grossing films domestically in 2023. The international scene holds even brighter prospects, especially for movies that were initially dismissed as underperformers. An illustrative example is Elemental, which barely crossed the $150 million mark in the US. However, its global box office earnings have surged to $458 million. Remarkably, Elemental is the first Disney film since last year's Avatar: The Way of Water to rake in more than two-thirds of its ticket sales from international audiences.
While the specter of Hollywood strikes poses a challenge to Disney's upcoming releases, the company is far from being written off. Despite being embroiled in political challenges on its home turf, Disney remains a thriving brand for moviegoers in the significantly larger international arena. With CEO Iger prioritizing the quality of forthcoming big-screen productions and global audiences showing a willingness to return to theaters, this is another domain where Disney's prospects are set to improve.
- Extension of the Iger Contract: A Positive Move
When Bob Iger returned as Disney's CEO last November, he signed a two-year contract, which was subsequently extended to a four-year tenure this summer. Despite the company's stock trading lower than when his return and contract extension were announced, this doesn't reflect Iger's lack of success.
Iger deserves the necessary time to navigate the turnaround effectively. The urgency to curtail losses at Disney+ by the end of the upcoming year has diminished. This expanded timeline provides more flexibility for strategic decisions, including asset acquisitions or divestitures, long-term enhancements across all business sectors, and a more comprehensive approach to identifying and grooming a successor, in contrast to his previous attempt.
- Thriving Theme Parks Remain at the Helm
Amid the stock's decline from its peak in early 2021, the remarkable success of Disney's theme parks business often goes unnoticed. Even in the face of slightly reduced attendance at Disney World during the latest quarter, the park continues to generate revenue and operating income that surpasses its pre-pandemic heights of fiscal 2019 by 21% and 29%, respectively.
Exciting expansions are on the horizon for Disney's resorts in Hong Kong and Shanghai later this year. While a new contender, Epic Universe, is slated to emerge in central Florida in 2025, this serves as an additional incentive for Iger to remain at the helm until 2026, ensuring that Mickey Mouse and his domain are well-prepared to face this new challenge.
- Historically Attractive Valuation of the Stock
The current stock performance is shadowed by losses incurred by Disney+ and the gradual global recovery from the pandemic. However, the outlook is promising. Presently, Disney's stock is trading at a mere 17 times the projected earnings for the upcoming fiscal year starting in October. Looking ahead to fiscal 2027, this valuation drops to an even lower 10 times.
The media industry has faced a period of disfavor. The shift from traditional linear networks to streaming services has inflicted challenges on both revenue generation and profitability. Notably, Disney stands as one of only three media companies to enact substantial price hikes, exceeding 20%, for their premium streaming platforms this summer.
Gone are the days of a race to the bottom for media stocks. This sector has evolved into a strategic choice for investors seeking a turnaround opportunity. Disney, a historical leader in the field, has traditionally commanded a premium in the market. Presently, its stock is attractively priced, particularly if the recovery transpires gradually. Moreover, the valuation becomes exceptionally compelling if a more rapid upswing materializes, propelling profit targets to higher levels.
As long as the price is below 92.00, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 92.23
- Take Profit 1: 79.00
- Take Profit 2: 72.00
Alternative scenario:
If the level of 92.00 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 92.00
- Take Profit 1: 96.00
- Take Profit 2: 100.00
