To The Moon

$Walt Disney(DIS)$

Over the past five years, Disney's stock has under performed, dropping 36%, and it is currently trading at levels similar to 2014. Despite a profitable direct-to-consumer business, growing free cash flow, dividends, and stock buybacks, the stock continues to decline. Many shareholders are frustrated, with varying opinions about the stock's future.

Earning Overview

In a recent earnings report, Disney exceeded expectations with a beat on earnings and revenue, but the stock still dropped due to weaker-than-expected performance in domestic theme parks. The slowdown is attributed to broader consumer challenges, including inflation and increased living costs, which have impacted spending on leisure activities.

Despite this, Disney continues to invest heavily in its parks, with plans to allocate over $60 billion over the next decade to enhance cruise lines and theme parks. In the direct-to-consumer segment, Disney+ saw growth in U.S. subscribers, but international growth has stalled due to lost content rights, such as cricket in India. However, the profitability of Disney's streaming business has improved significantly, turning a $1.5 billion loss into a modest profit of $47 million.

Disney's recent price hikes for its streaming services (Disney+, ESPN+, and Hulu) are expected to generate substantial additional revenue, potentially boosting cash flow and profitability. The company’s guidance for the future remains strong, with earnings per share expected to grow 25%, and free cash flow is forecasted to reach $8 billion, up from $3 billion the previous year. The company is also continuing its buybacks and increasing dividends by 50%.

Despite these positive moves, Disney's stock has struggled with a challenging environment, including strikes, inflation, and a weaker consumer. The stock, which was once overvalued at 25 times earnings, is now trading at a more reasonable 17 times earnings. Over the next five years, analysts expect an 8% annual growth in earnings per share. Based on this, Disney’s fair value could be around $162 per share in five years, offering an 85% upside. A more conservative estimate places the stock's future value at $135 per share, a 54% upside.

Business Model

Disney divides its business into three main segments: sports, experiences, and entertainment. This structure provides useful insights into what’s happening within the company and helps explain why the stock has dropped around 50%. Let’s review some of the numbers, then dive deeper into each segment to understand their role in Disney’s performance and whether the stock is worth investing in today.

Challenges

Looking at Disney’s revenue over the last decade, it appears the trend has been generally positive, with a minor dip around COVID-19. However, when we turn to their profit and free cash flow, the picture changes. COVID-19 is a key factor in the downturn, but even after recovery, Disney has struggled to regain momentum compared to other companies. So, to better understand the reasons behind this, we’ll take a closer look at the three business segments.

First, let’s look at Disney’s operating profit margins for the past couple of years. Overall, they’ve been consistent across segments, but when we compare these to 2019 (before COVID), the picture changes. The sports segment has seen a drop in margins, while experiences have improved. Entertainment, however, has seen a significant decline in margins. We’ll break down these segments to see why these changes occurred.

The sports segment, which includes ESPN, is currently facing challenges, primarily due to the decline of traditional cable TV subscriptions. Disney has been exploring new opportunities like teaming up with Fox Sports and TNT Sports to create a streaming service for sports, similar to Disney Plus. While this could be promising, there are potential legal hurdles to consider.

Next, we have the experiences segment, which includes Disney theme parks, hotels, cruises, and merchandise. This segment accounts for about a third of Disney’s total revenue and has generally shown growth post-COVID, although some fluctuations have been observed. The question is whether this growth is sustainable or driven by one-off factors like pent-up demand and price hikes. Indeed, Disney has raised prices at their parks, which has boosted revenue but could impact demand in the long term.

Finally, we look at Disney’s entertainment division, which encompasses movies, TV shows, and Disney Plus. This segment’s challenge is profitability, as Disney has been pouring large amounts of money into content production, but hasn’t yet fully figured out how to make this investment profitable in the streaming world. Despite their vast library of content, monetizing it effectively remains a big question.

Fundamental Analyst

When we look at analyst projections, we can see that revenue is expected to grow gradually, though not rapidly. Free cash flow projections show moderate growth, but Disney still faces challenges, particularly in terms of monetizing their entertainment business. That said, the company does have strong cash flow from other segments, such as experiences, which can support its entertainment investments.

 Given the uncertainties surrounding Disney's CEO succession and debt levels, I believes that a price range of $70–$75 per share would be an ideal buying opportunity for those taking a conservative approach. However, for those with a more aggressive outlook, Disney could still be considered a worthwhile investment at its current price of $88 per share, though other opportunities like Google and Amazon may offer better prospects.

Discounted free cash flow

Currently, based on a discounted free cash flow calculation, Disney stock appears to be overvalued. With a fair value of $58 per share, and the stock trading at around $94, it’s clear that Disney is priced higher than what its fundamentals suggest. I wouldn’t buy more shares at this price, though I’m holding onto the shares I already own, as I believe in Disney’s long-term potential. If the stock drops significantly, I may buy more to lower my average purchase price.

Ultimately, Disney’s future depends on how well it can manage its streaming business, balance pricing with demand in its parks, and adapt to the changing media landscape. For now, it seems best to wait for a better entry point before buying additional shares.