Despite more that doubling from its March 2020 lows, at the current price of $177 per share, Walt Disney stock (NYSE: DIS) still looks undervalued. Disney stock has rallied from $86 to $177 off its recent bottom, compared to S&P 500 which increased over 85% from its recent lows. The stock has outperformed the market over the last one year due to an extremely strong performance by its streaming business, Disney+, as streaming demand has been high during the pandemic. Along with continued strong demand for streaming, with gradual lifting of lockdowns and a successful vaccine rollout, Disney’s traditional businesses like cable and theme parks are also expected to see recovery in the coming quarters. Signs of recovery of its business are seen with Disney returning to U.S. multiplexes in March 2021 after almost a break of one year. Also, Disney reopened its original Disneyland and its adjacent Disney’s California Adventure sister park in the last week of April 2021. Thus, despite the stock more than doubling since March 2020 and being 65% above its December 2017 level, we believe expectations of higher revenue and earnings in 2021 and 2022 will provide Disney’s investors with a potential gain of more than 15%. Our dashboard Buy Or Fear Walt Disney Stock has the underlying numbers.
Some of the stock price rise between 2018 and 2020 can be justified by the P/S multiple rising more than 60% from 3x to 5x. During the same period Disney’s revenues increased 18.6% from $55.1 billion to $65.4 billion. However, with the number of shares rising sharply on account of acquisitions, on a per share basis the revenue increased only 2% from $35.18 to $35.84 during this time. Thus, the rise in the P/S multiple was entirely driven by expectations of continued strong growth in streaming and the revival of traditional business segments post pandemic. The P/S multiple, which currently stands at around 5x, is likely to remain elevated at the current level as revenue and earnings expectations remain strong for the near term.
Where is the stock headed?
The global spread of coronavirus led to lockdown in various cities across the globe, which has affected industrial and economic activity. Due to lockdowns in almost all major cities over the globe, film shooting has been halted while amusement parks have been shut for months. The company’s traditional key revenue sources – theatrical, theme parks, etc. – has come to a virtual stop due to the pandemic. Additionally, the cord-cutting has led to a drop in Cable TV and advertising demand. This was evident in the Q3 2020 results of the company where Disney’s revenues decreased 42% y-o-y. Things began to improve a bit in Q1 2021 (ending Dec 2020), where the y-o-y revenue decline was 22% and in Q2 2021 when the revenue decline was 13%.
There have been signs of reopening of the economy and lifting of lockdowns which led to a surge in the stock price. The successful vaccine rollout has also led to expectations of faster demand revival, with theatrical releases and reopening of theme parks likely to get back on track soon in the coming months. Any further recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Israel. The company is currently focusing on streaming, with Disney+ having a subscriber base of more than 103 million in just one and a half years of operations. To put things in perspective, Netflix NFLX achieved a subscriber count of 200 million after a decade of operations; at the current rate Disney is likely to reach that milestone is a much shorter time. Additionally, the company’s traditional businesses are also likely to see a turnaround in 2021 and 2022 as advertising, theme parks, and cable revenues get back on track. Thus, with investors’ focus having shifted to 2021 and 2022 numbers, strong revenue and earnings growth in the next two years will drive a further rise in the stock price. As per Trefis, Disney’s valuation works out to $205 per share, higher than its current market price.
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