Disney (NYSE:DIS) has an exceptional legacy to trade on, and it has recently been successful in engendering profitability in its streaming segment, but the stock’s valuation is currently too rich for reliable alpha. A few months ago I was bullish on Disney stock, but now that it is priced higher, my calculations show that alpha is somewhat unlikely. Therefore, I am neutral on the stock, as while it may continue to appreciate in value, it is also very likely that this appreciation will be below the returns one could achieve investing in the S&P 500 (SPY).
Disney stock has recently reached a fairer valuation as market sentiment improved following the company reporting profitability in its direct-to-consumer segment, including Disney+, Hulu, and ESPN+, for the first time. In Q4 2023, Disney reported a $387 million loss for the segment, compared to a $321 million operating income for Q4 2024, with its first minor operating income for the segment recorded in Q2 2024. This is a critical inflection point for the company and its stock, because it had previously reported annual losses of up to $4 billion for its streaming segment as recently as Fiscal 2022.
Similar to Amazon (NASDAQ:AMZN) with its new Prime Video ad-supported tier, Disney has opted for the same model to aid it in driving profitability. CEO Iger has noted that the strategy helped to increase average revenue per user, and in Q4, advertising revenue for Disney’s direct-to-consumer segment grew by 14% year-over-year. Disney+, the company’s core streaming platform, also continues to grow robustly; it added 4.4 million subscribers in Q4.
The Disney brand is continuing to be built to grow, not simply to last. The company has committed to doubling its capital expenditures for its Parks and Experiences segment, allocating over $60 billion over 10 years, nearly twice the amount allocated in the previous decade. The Parks and Experiences segment accounted for 70% of Disney’s profit in recent years, so this underscores the strategic importance of continuing to consolidate this area of the company’s operations. In Fiscal 2023, the Parks and Experiences segment posted $32.55 billion in revenue, and its operating income increased by over 23% year-over-year. One of the greatest assets that Disney has is its intellectual property, which helps it to charge more for experiences that create lasting memories and high value for customers through brand recognition, largely developed through its movies and theater productions.
That said, there is only so much growth that a company as large as Disney, with markets as saturated as its markets are, can achieve in the medium- to long-term future. For example, Disney’s parks are highly popular, but they operate in mature markets like North America, Europe, and Japan. These regions have demographic constraints and natural economic limitations on Disney’s growth. As a specific example, Tokyo Disneyland has reached a point where further expansion is constrained by the local market’s size; management expects its attendance to be down by 11% from its high in 2019 despite the opening of a $2.1 billion expansion in 2024.
Then, there is the growing and very robust competition from streaming services like Amazon Prime (22% market share) and Netflix (NASDAQ:NFLX) (21% market share), which are undeniably dominant against Disney+ (12% market share). I consider the greatest risk to Disney’s long-term growth prospects to be customer fatigue. There is some risk that the company will be viewed as a heritage company in time, rather than a modern entertainment leader, as it has historically been unequivocally considered. It is largely the company’s moderate growth prospects amid market saturation and competition, combined with no undervaluation, which leave me neutral on the stock.
Disney’s historical five-year revenue growth rate is 5.8%, compared to a consensus future three-year revenue growth rate estimate of 4.7%. However, the company’s historical five-year earnings per share without non-recurring items growth rate is 4.5%, compared to 11.6% as a future three-year consensus growth rate estimate. Given this, it is completely valid for the company’s valuation multiples to improve somewhat moving forward compared to recent history. The company’s price-to-sales ratio of 2.2 is currently just above its three-year median of 2.1. In my opinion, this may be slightly too low, given the higher earnings growth outlook moving forward.
Don’t Expect Alpha From Disney Stock
With $112.5 billion in revenue in January 2030, the company will likely have $16.9 billion in net income if its net margin expands to 15% due to continued profitability in its direct-to-consumer segment, success in shifting to higher-margin legacy content, and further higher return on invested capital at its theme parks, among other factors.
Don’t Expect Alpha From Disney Stock
The company’s basic share count has been increasing in recent years, but as the company’s general profitability improves post-pandemic and with income reported from streaming, the company will likely rely less on share issuance. To be conservative, I am forecasting an equal share count to present, 1.81 billion, for January 2030. Therefore, I estimate a revenue per share of $62.15 and a basic earnings per share of $9.34 for Disney in January 2030.
I will use the price-to-sales ratio for my terminal multiple, because the company has instability in its earnings, distorting the long-term trends in its price-to-earnings ratio. A price-to-sales ratio terminal multiple allows for more accuracy in my estimate. As I explained above, with better profitability moving forward, the company’s price-to-sales ratio will reasonably expand. I use a terminal multiple of the approximate midpoint of the final value of the 15-year price-to-sales ratio trendline in my chart above, and its current price-to-sales ratio. The terminal multiple is, therefore, 2.5. Therefore, I forecast that the company will have a January 2030 stock price of nearly $155. The current stock price is $110, so the compound annual growth rate indicated over five years is 7%.
Disney’s cost of equity is 13%, based on the risk-free rate of return of 4.65% (10-Year Treasury Constant Maturity Rate) plus Disney’s beta of 1.4 multiplied by the market premium of 6%. When discounting my January 2030 price target of $155 back to the present day using the company’s cost of equity as my discount rate, the intrinsic stock value today is $84. The current price is $110, so the margin of safety for investment is negative, at -23.5%, based on my model.
My valuation model posits that Disney stock will deliver just a 7% compound annual growth rate in its price over the next five years, with a negative margin of safety of -23.5% at this time. Therefore, there are certainly better investments on the market. Despite this outlook that is heavily impacted by valuation factors, Disney is continuing to operate reasonably well, with profitability in streaming and a highly accretive Parks and Experiences segment. However, its focus on legacy content to drive higher margins could also leave the company devoid of attractive and novel intellectual property over the long term. This double-edged sword makes me think Disney is vulnerable to decline over the next few decades.
Disney stock has long been a favorite among investors, known for its strong brand and diversified portfolio of entertainment assets. However, in recent years, the stock has struggled to outperform the broader market, leading some investors to question whether it can still deliver alpha.
While Disney remains a solid long-term investment, it’s important for investors to adjust their expectations when it comes to generating alpha from the stock. The company’s growth prospects are somewhat limited compared to other high-flying tech stocks, and its traditional media businesses face challenges from streaming competitors.
That being said, Disney’s streaming services, Disney+ and Hulu, continue to show strong growth potential, and the company’s theme parks and consumer products divisions provide a solid revenue stream. Additionally, Disney’s acquisition of 21st Century Fox has bolstered its content library and positioned it well for the future.
Overall, investors should not expect Disney stock to deliver outsized returns in the short term. However, for those looking for a stable, dividend-paying investment with long-term growth potential, Disney remains a solid choice. Just remember, alpha may be harder to come by with this blue-chip stock.
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