Is Disney Stock Still a Buy After Disappointing Earnings?

Walt Disney (DIS, $99.90) stock plunged Wednesday after the media conglomerate's fiscal fourth-quarter results missed analysts' estimates and management warned of slower growth going forward.

Disney stock, a component of the Dow Jones Industrial Average, gapped down by more than 11% soon after the opening bell. Disney, which posted earnings late Tuesday, added that it would slash spending on content amid losses in its strategically important Disney+ streaming business. 

A number of analysts responded to the disappointing results by slashing their target prices on Disney stock, but most of Wall Street stuck by its bullish recommendations.

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Disney stock gets a consensus recommendation of Buy, and with high conviction, to boot. Of the 29 analysts issuing opinions on Disney stock tracked by S&P Global Market Intelligence, 18 rate it at Strong Buy, seven say Buy and four have it at Hold. 

Their average price target, however, fell to $136.01 from $140.08 on Tuesday. And yet with Disney stock off sharply on the ugly earnings news, the Street's new target price gives DIS implied upside of more than 50% in the next 12 months or so. That's up from an implied upside of about 40% just 24 hours ago.

For the record, Disney recorded adjusted earnings per share (EPS) of 30 cents, far short of analysts' estimate for adjusted EPS of 56 cents, according to S&P Global Market Intelligence. Revenue came in at $20.2 billion vs. Wall Street's forecast of $21.4 billion. 

Disney management blamed the shortfalls on several factors, including lower content sales as a result of having fewer theatrical film releases during the quarter, weaker-than-expected results at theme parks, and sluggish revenue growth in the media division.

But most alarming to traders and investors was Disney's growth forecast for the current fiscal year. 

"Assuming we do not see a meaningful shift in the macroeconomic climate, we currently expect total company fiscal 2023 revenue and segment operating income to both grow at a high-single-digit percentage rate versus fiscal 2022," Chief Financial Officer Christine McCarthy said on a conference call with analysts. 

The Street was looking for revenue to increase by about 14% in the current fiscal year. Operating income was projected to increase about 17%. 

Earnings and revenue misses are bad news, but stocks, being forward looking, are generally far more sensitive to any cut in a company's outlook. That's why Disney stock is taking a beating following its report.

Nevertheless, analysts remain steadfast in their belief that it's time to buy the dip in Disney stock. And they certainly appear to have valuation on their side. DIS stock changes hands at just 17.3 times analysts' fiscal 2024 EPS estimate. That's a compelling price to pay for a company forecast to generate average annual EPS growth of more than 33% over the next three to five years.

For one thing, although the streaming or direct-to-consumer (DTC) business is still bleeding red ink, Disney bulls say it's only a matter of time before the company is able to swing the division to profitability by introducing an advertising supported option.

"Disney+'s ad-supported tier is going to be a game changer for its subscriber and revenue growth, and considering Disney's slumping average-revenue-per-user growth and increasing DTC operating losses, its launch can't come soon enough," writes Third Bridge analyst Jamie Lumley. "Disney is in a better position than Netflix from an operational perspective because they already have a lot of advertisement technology and infrastructure in place through Hulu and ABC network channels."

At Morgan Stanley, analyst Ben Swinburne rates Disney stock at Overweight (the equivalent of Buy), arguing that declining losses in streaming and continued growth in the parks segment can help EPS roughly double by fiscal year 2025.

True, anyone considering committing fresh capital to Disney stock would do well to remember that valuation only tends to work its magic over the longer term. That said, there is no disputing that shares have not been this cheap in a long time. Over the past five years, DIS has traded at an average of almost 38 times the Street's EPS forecast, per Refinitiv Stock Reports Plus. 

In other words, at current levels, Disney stock offers more than a 50% discount to its historical forward price-to-earnings multiple. That's an attractive relative valuation, and suggests that shares have been beaten down beyond reason.

Disney stock is now off more than 40% for the year-to-date. And while there's no telling when the pain might end, it has rarely been on sale to this extent. Patient investors might want to take a cue from the abundance of bulls on the Street and scoop up this name while its relative valuation remains so deeply depressed.