Disney Stock Tumbles: Time to Buy?

Disney stock predictably plummeted Thursday after Walt Disney (DIS) posted a drop in streaming subscribers for a second consecutive quarter.

Making matters worse, Disney, a component of the Dow Jones Industrial Average, forecast its direct-to-consumer business to suffer a wider-than-expected loss in the current quarter. The streaming business, which includes the company's flagship Disney Plus service, will lose upwards of $759 million in the ongoing quarter, Chief Financial Officer Christine McCarthy told analysts on a conference call late Wednesday, citing a shift in marketing costs.

The streaming division recorded an operating loss of $659 million in Disney's fiscal second quarter, which ended April 1. Although that was better than the $850.3 million loss analysts forecast, it underscored how expensive it is to go head-to-head with deep-pocketed competitors such as Netflix (NFLX), Amazon.com (AMZN) and Apple (AAPL), to name just a few.

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Disney stock lost almost 9% Thursday, erasing $16 billion in market value. Disney stock is now up 6.2% for the year-to-date on a price basis, lagging the performance of the S&P 500 by more than a percentage point.

DIS stock happens to be one of the best stocks of the past 30 years, generating an annualized dollar weighted return of 10.6% between 1990 and 2020, according to Hendrik Bessembinder, a finance professor at the W.P. Carey School of Business at Arizona State University. However, shares in the media and entertainment giant haven't really been the same since the onset of the COVID-19 pandemic.

True, the reopening of movie theaters and theme parks over the past couple of years has allowed Disney's earnings and revenue to recover. CEO Bob Iger has also indicated that he wants to reinstate the dividend, which Disney suspended in March 2020. And, of course, Disney is cutting 7,000 jobs in a bid to cut costs by $5.5 billion. 

Those moves haven't been enough to mollify the market, however, which continues to be alarmed by Disney's steep investments in streaming. 

Disney stock is off by 15% on a price basis over the past three years, a period in which the broader market gained more than 40%. What's uglier is that Disney stock remains about 50% below its all-time closing high set back in March 2021.

Disney stock: Buy, Sell or Hold?

Disney stock's depressed share price could theoretically offer an attractive entry point for what has proven to be an outstanding buy-and-hold name. Bulls can certainly make a case for DIS stock based on valuation. Shares trade at just 17 times analysts' next-12-months earnings per share (EPS) estimate, according to S&P Global Market Intelligence.

That's a bargain considering that Wall Street forecasts Disney to generate average annual earnings growth of almost 20% over the next three to five years. Disney stock also looks cheap when you consider that it has traded at an average of 26 times expected earnings over the past five years.

It's also true that the Street is collectively bullish on the name. When looking at all Dow stocks ranked by industry analysts, Disney lands at No 2, just behind Microsoft (MSFT). Of the 32 analysts issuing opinions on DIS stock surveyed by S&P Global Market Intelligence, 19 rate it at Strong Buy, seven say Buy and six call it a Hold. That works out to a consensus recommendation of Buy, with very high conviction. 

Bulls note that Disney did beat the Street's top-line estimates in its most recent quarter and that CEO Iger said the company plans to lift the price of the Disney Plus ad-free tier again this year. The company's theme parks division also continues to "roll on," in the words of Morgan Stanley analyst Ben Swinburne, who rates DIS at Overweight (the equivalent of Buy.) 

Then there's Deutsche Bank analyst Bryan Kraft (Buy), who is another Disney stock bull. He recommends clients buy the stock "on any weakness" following the company's subscriber miss. 

Striking a more cautious note is Needham analyst Laura Martin, who rates Disney stock at Hold. Although Disney+ subscription numbers rose by about 1 million overseas, they fell by 400,000 in the U.S., for a net addition of 600,000, she notes. 

In a nod to Disney stock's success as a long-term holding, we'll give the last word to David Trainer, CEO of New Constructs, who preaches patience with the name. 

"At its current valuation, Disney's stock is cheap and we remain bullish, as CEO Bob Iger is leading a turnaround in the economics of the business," Trainer says. "We believe the stock will recover much of what was lost over the past few years. Disney's Return on Invested Capital (ROIC), a key measure of profitability, is already starting to recover and we expect it to return to the 12% to 13% range, compared to its current level of about 2% to 3%."

The bottom line? Most of the Street sees the selloff in Disney stock as an opportunity to buy a quality name at a discounted price.