Down 46%, Is Disney Stock a Buy in 2023?

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Down 46%, Is Disney Stock a Buy in 2023?

The last couple of years have been tough for Disney stock. In March 2021, the stock price stood at $189.99, but it has since fallen sharply to just $101.14 (as of 10th May 2023), representing a decline of 46.77%.

The decline in the stock price is largely related to costs associated with the company’s online streaming platform, Disney +, which it launched in 2019 to rival other streaming giants, such as Netflix or Amazon Prime.

Disney has pumped around $10bn into the project since its inception, with the company being focused on minimizing losses ever since. This has involved the company slashing costs, reducing spending on marketing, and increasing the price of the service.

In the first quarter of 2023, Disney successfully reduced the level of loss generated by Disney +, despite losing 4 million subscribers.

However, the loss of 4 million subscribers has been linked to the loss of Indian Premier League cricket on its Hotstar service in India. According to CEO, Bob Iger, the increased subscription cost more specifically, could only be associated with the loss of 300,000 subscribers.

So, despite the turmoil that Disney has endured with the loss-making Disney + service, is it still a worthwhile investment in 2023?

Since launching the service in 2019, Disney have spent more than $10bn on Disney +.

The positives

While Disney + has resulted in consistent losses for the company to date, there are positives that need to be considered when deciding whether Disney is a worthwhile investment or not.

Firstly, revenue growth across the last 5 years has been encouraging, increasing from $59.43 bn in 2018 to $82.72 bn in 2022, representing a 39.189% rise. As Disney restructure their business and cut costs, the level of net income produced from the revenue will likely increase, which will be well received by investors.

Although the net income yield currently stands at 4.4%, Disney previously saw net income yields in the region of 21% pre-pandemic, such as in 2018. Therefore, should the company be able to return to said levels, net income could rise to around $17.37 bn, based on the level of revenue seen in 2022. This would mean that net income could rise by 451.43% from the $3.15 bn achieved in 2022.

Historically, Disney has had an average P/E ratio of 19.74, which means that with a net income of $17.37 billion, the stock price could rise to $190.14. With that said, it is important to note that investors have lost trust in Disney, which is a key challenge that may limit this level of stock price growth.

Secondly, attendance has risen distinctly since COVID-19 restrictions ended, particularly in the United States. The operating income of the parks increased by 25% in the 1st quarter of 2023 to $3.1 billion, while revenues rose by 21% to $8.7 billion.

This is likely to increase further as restrictions end globally, with attendance likely to rise in locations such as in Shanghai, where the zero COVID policy had previously limited visitor numbers.

Finally, while Disney + is currently loss-making, those losses are decreasing in severity, with the expectation being that profitability will be achieved by October 2024. With business as usual in the Disney parks and experience, as well as a soon-to-be profitable Disney + platform in the pipeline, it is likely that the company will experience an uptick in its financial performance across the next 2 to 3 years, which will likely translate into stock price increases.

Risks

As much as the future prospects of Disney might be favorable, there are substantial risks that investors need to consider.

Firstly, Disney is primarily reducing their costs through reduced spending on marketing. This could result in sluggish subscriber growth on Disney +, especially when the platform is just 4 years young.

Reduced marketing may mean that consumers lack awareness of the platform or that they have no incentive to actually join (i.e. they don’t hear about the latest series/movies added).

This could mean that Disney focuses on increasing the price of the platform to increase profits from the existing user base, which may lead to an increased proportion of subscribers leaving the service.

Secondly, the company is currently engaged in a legal battle against Florida Governor, Ron DeSantis, who has threatened to take away many of the freedoms that the company enjoys at its World Resort in Orlando, Florida.

The conflict began when, Bob Chapek, Disney’s previous CEO, opposed Florida’s Parental Rights in Education law, which angered the Florida governor.

In response, DeSantis has outlined his intention to get revenge on Disney and has discussed implementing potential penalties for Disney, which could include adding toll roads around the Orlando theme parks, introducing new taxes on its hotels, or even building a prison nearby – all of which would severely damage Disney’s park business.

Although Disney has taken DeSantis to court, and it seems likely that the American business will win its case, the rift adds an additional level of risk that investors need to consider.

Finally, the revenue of Disney’s television networks decreased by 7% in the first quarter of 2023, with operating income dropping to 35%, which is the consequence of lower advertising sales. As interest rates rise and companies start to tighten their spending, this is likely to fall further.

This is a key concern, at least in the short term, as Disney’s television networks make up 33% of the total revenue of the firm. Further declines could have a detrimental impact on future revenue growth.

Notice: The content provided does not constitute personal advice or a personal recommendation. No content should be relied upon as constituting a personal recommendation. If you require any personal advice or recommendations, please speak to an independent qualified financial adviser. No liability is accepted by the author, for any loss or detriment experienced by any individual.

Methodology

Methodology